How to tell when cryptocurrencies reach their peak? Top technical analysis indicators for popular markets

Table of contents

• Top technical analysis indicators for popular markets
• Relative strength index
• Pi cycle top indicators
• Cryptocurrency Fear and Greed Index
• Bitcoin Rainbow Chart
• One-picture balance table
• When and how to make a profit?
• Combining multiple indicators
• Backtesting top signal

Like most financial instruments, cryptocurrencies rarely experience sustained growth. Ultimately, most cryptocurrencies will reach market saturation, or market sentiment will change significantly, causing their value to fall.

Ideally, traders would seek to buy at the "bottom" and sell at the "top". In fact, this means buying at the lowest possible price and selling at the highest possible price. The difference is profit.

Unfortunately, predicting prices to hit the top is not easy. Many traders failed to close their positions before reaching the top, while some traders eventually became "arbitrageurs" - continuing to hold assets with little hope of recovery.

Still, there are dozens of indicators that can now hint at when to peak, providing traders with potentially useful insights on when to enter and exit positions.

Top technical analysis indicators for popular markets

Here, we look at the four most popular top signals – paying special attention to Bitcoin, as it tends to lead the market. After all, when Bitcoin hits its peak, most altcoins tend to follow up at the same time.

Relative strength index

The Relative Strength Index (RSI) is one of the easiest and most commonly used top and bottom indicators.

It is a relatively intuitive momentum oscillator that tracks the closing price of a specific asset during a specific trading period. It is calculated from three simple components: the relative strength index (RS), the average increase and the average decline.

Among them, the average return is the average return in the past 14 days, and the average loss is the average loss in the past 14 days. RS is the average return/average loss.

The RSI can then be calculated using the following formula:

RSI = 100 – (100 / [1 {14-day average increase/14-day average decrease}])

Fortunately, most popular charting platforms automatically calculate RSI and display it on the chart.

When the RSI exceeds 70, an asset is considered overbought, while an RSI below 30 indicates an asset is oversold. Therefore, a very high RSI may indicate that it is time to exit the position, while a lower RSI indicates a good time to enter.

Due to the cryptocurrency market volatility, it is not uncommon for extreme values ​​to RSI indicators. However, the extreme values ​​of the RSI indicator tend to overlap with the top and bottom of the market. Even so, combining RSI indicators with other major indicators makes it wiser to make smarter trading decisions.

Pi cycle top indicators

The Pi cycle top indicator uses multiples of the 111-day moving average (111DMA) and the 350-day moving average (350DMAx2) to predict the top of Bitcoin.

The Pi cycle top indicator attempts to identify the biggest boom point, indicating that the callback is coming. This is a powerful indicator when the 111DMA moves upward and breaks through the 350DMAx2 line, indicating that Bitcoin has reached or approached the top.

Historically, this intersection is consistent with or close to the top of the previous Bitcoin cycle.

Therefore, when 111DMA equals 350DMAx2, it is time to consider exiting—for example, checking whether other top metrics point to the same conclusion.

The name of the Pi period top indicator is derived from 350 divided by 111 equals 3.153, which is roughly the value of the mathematical constant π (Pi).

Cryptocurrency Fear and Greed Index

The Crypto Fear and Greed Index is expressed as a value between 0 and 100, where 0 means the market is in a state of “extreme fear” and 100 means “extreme greed.”

Generally speaking, extremely low scores indicate that the market is close to the bottom, while extremely high scores indicate that the market is close to the top.

The indicator consists of a variety of data sources, including volatility (25%), market momentum (25%), social media (15%), surveys (15%), dominance (10%) and trends (10%). Together, these factors form a single score that measures overall market sentiment.

Historically, the index reached its highest level when the total market capitalization of the cryptocurrency market approached its peak, and the opposite was true when Bitcoin approached the bottom.

In August 2023, CoinMarketCap launched our independently developed cryptocurrency fear and greed index. Unlike most of the Fear and Greed Indexes that focus on Bitcoin, CMC’s index covers sentiment in over 20,000 cryptocurrencies on the CMC platform. The index calculates scores based on five different factors: price momentum, volatility, derivatives market, market composition, and proprietary data of CMC.

Bitcoin Rainbow Chart

Bitcoin rainbow chart, as the name suggests, is a rainbow-like chart formed by simple logarithmic regression that depicts the change of Bitcoin price over time. The chart superimposes the historical price of Bitcoin on a colored chart and indicates with a strip line that it may be close to the top or bottom.

The closer the price is to the red area, the greater the possibility of hitting the top; the closer the price is to the blue area, the greater the possibility of hitting the bottom. As you can see, Bitcoin prices tend to have a sharp reversal after entering the orange and red zones.

The chart is formed using historical data and has no scientific basis, but many traders still use it to predict future Bitcoin prices.

The rainbow chart may provide some value for those who wish to determine the best entry and exit points for Bitcoin and other Bitcoin-related digital assets.

In addition to the Bitcoin rainbow chart, there is also the Ethereum rainbow chart.

One-picture balance table

The one-picture equalization table uses multiple forward projected lines to visually display support and resistance.

The entire indicator is built around the following five lines:

• (1) Conversion line or Tenkan-sen: the moving average of the first nine candlesticks.
• (2) Baseline or Kijun-Sen: Moving average of the first 26 candlesticks.
• (3) Leading span A or Senkou Span A: Moving average of the conversion line and baseline, predicting the next 26 cycles.
• (4) First span B or Senkou Span B: the moving average of the past 52 candlesticks, predicting the next 26 cycles.
• (5) Lag span or Chikou Span: The current closing price of the candlestick is projected to the price of the past 26 cycles.

As shown in the figure above, the space between them is colored depending on which of the leading spans A and B is higher. When the current conduction span A is higher than the leading span B, the cloud is green; otherwise, it is red.

Kumo Cloud is a special feature of the Ichimoku system, which refers to this colorful area. Considering that the cloud-like cloud uses 26 K-lines, it has unique predictive insights.

When the price is higher than the cloud line, it indicates an upward trend. Cloud lines play a supporting role in the upward trend. If the price falls below the cloud line, it means that the upward trend has lost momentum and the downward trend may have begun.

When and how to make a profit?

For cryptocurrency traders who are pursuing high returns, it is crucial to know when to make a profit. Although the core goal is to buy low and sell high, the challenge lies in how to accurately grasp the best time to close the position and make a profit. Although the indicators show that the market has peaked, closing positions may be psychologically difficult to accept in an environment where buyers' enthusiasm continues to rise.

To cope with these situations, strategies adopted by experienced traders include:

• Partial profits are made at price milestones : traders do not need to close their positions in one go, but can gradually make profits in batches during the price increase. This can not only lock in part of the profits, but also leave room for further increase.
• Use trailing stop loss orders: When the price rises and falls below the set threshold, you can use the stop loss order to automatically sell. Stop orders will "track" the price at a set percentage or amount.
• Take advantage of fast rises to make a profit : Parabolic rises in cryptocurrencies usually experience a sharp pullback. After an exponential rise, you can retain funds for the next adjustment.

Combining multiple indicators

While a single metric like RSI can generate error signals, using multiple top and bottom metrics can improve accuracy and verify trend developments. Some methods of using multiple metrics include:

• Two or more indicators need to be consistent before action can be taken. For example, wait for the RSI uptrend to cross with the top of the Pi cycle before selling.
• Evaluate metric clusters or frameworks. Some tools (such as the Fear and Greed Index) combine multiple indicators into a comprehensive score.
• Look for confirmation between momentum and trend oscillation indicators. Combining RSI and MACD or stochastic indicators can confirm the top and bottom.
• Comparison of short-term, medium-term and long-term indicators. Indicators over different time frames can determine the duration of the trend.
• Consider volume and volatility signals. Extremely high trading volume and volatility are usually accompanied by a trend turning point.

When the top-level signals start to stack on different metrics, especially those using different datasets and methods, it is even more convincing that the local top may have been approaching.

Backtesting top signal

Backtesting refers to applying trading strategies or indicators to historical market data to evaluate their feasibility. For cryptocurrency traders, backtest tools and techniques can be used to fine-tune top and bottom metrics like RSI and Pi Cycle Top.

By replaying past price trends under various market conditions, traders can analyze how different indicator settings and combinations can effectively identify top and bottom. For example, testing RSI using thresholds between 65 and 85 can reveal the best overbought level for emitting the top signal.

The best method of backtesting is to use long-term accurate historical data. With enough data, traders can backtest the top and bottom signals throughout the market cycle to evaluate performance.

Effective backtesting also requires real simulation of real transaction conditions. In order to obtain more accurate results, factors such as slippage, price spread and expense should be considered.

Traders can use indicators such as win rate, profit factor, retracement and Sharpe ratio to compare performance. The most predictive indicators will maintain stable performance in various market environments.

Although past performance cannot guarantee future results, traders who are serious about backtesting strategies have more advantages in deploying technologies that have been proven to meet their risk preferences and profit goals through practice. In addition to using indicators, backtesting can also help traders develop intuition and experience in interpreting signals when actively trading. As always, the indicators and strategies mentioned above are not financial advice and are for reference only. Be sure to research yourself (DYOR) before investing in or trading any cryptocurrency.

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