Keep missing major crypto tops and watching gains evaporate? This comprehensive guide explores powerful indicators to help nail profitable exits.
Like most financial instruments, cryptocurrencies rarely experience unending growth. Eventually, most cryptocurrencies will reach market saturation or a significant change in market sentiment — causing them to lose value.
Under optimal conditions, traders look to buy the “bottom” and sell the “top.” Practically, this means buying it at the lowest possible price and selling it at the highest possible price. The difference is captured as profit.
Unfortunately, predicting the top is a less than straightforward process. Many traders fail to exit their position anywhere close to it, while some end up relegated to the position of bagholder — continuing to hold an asset that has little chance of recovery.
That said, there are now dozens of indicators that hint when the top may be in, giving traders some potentially useful insights about when to enter and exit their positions.
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Popular Market Top Indicators
Here, we take a look at four of the most popular top signals — with a particular focus on Bitcoin, since it tends to lead the market. After all, when Bitcoin tops out, most altcoins tend to follow suit around the same time.
Relative Strength Index
The relative strength index (RSI) is one of the simplest and most commonly used top and bottom indicators.
It is a relatively intuitive momentum oscillator that tracks the closing prices of a particular asset over a given trading period. It is calculated using three simple components: relative strength (RS), average gain and average loss.
Whereby average gain is the average gain over the previous 14 days and average loss is the average loss over the past 14 days. RS is simply the average gain / average loss.
The RSI can then be calculated using the formula:
RSI = 100 – (100 / [1 + {14-Day Average Gain / 14-Day Average Loss}])
Fortunately, most of the popular charting platforms will automatically calculate the RSI and display it on a chart.
When the RSI is over 70, the asset is considered overbought whereas a value under 30 indicates the asset is oversold. As such, an extremely high RSI might indicate that it is time to exit a position, whereas a low RSI indicates a good entry point.
Because cryptocurrency markets are extremely volatile, it isn’t unusual to see extreme RSI figures. However, the most extreme RSI figures tend to overlap with market tops and bottoms. Nonetheless, it’s wise to combine the RSI with other top indicators to make more informed trading decisions.
Read more: How to use RSI in crypto trading?
Pi Cycle Top Indicator
The Pi Cycle Top Indicator uses the 111-day moving average (111DMA) and a multiple of the 350-day moving average (350DMAx2) to forecast Bitcoin's top.
The Pi Cycle Top Indicator attempts to identify the point of maximum exuberance, indicating that a pullback is near. When the 111DMA moves up and crosses above the 350DMAx2 line, this is a strong indicator that Bitcoin is at or near the top.
Historically, this point of crossover has aligned at or close to the top of previous Bitcoin cycles.
As such, when the 111DMA is equal to the 350DMAx2, it is time to consider making an exit — such as by checking if other top indicators point to the same conclusion.
The Pi Cycle Top Indicator gets its name from the fact that 350 divided by 111 is equal to 3.153, which is roughly the value of the mathematical constant π (Pi).
Learn more about the Pi Cycle Top Indicator!
The Crypto Fear and Greed Index
The Crypto Fear & Greed Index is expressed as a value from 0 to 100, whereby 0 indicates the market is in a state of "extreme fear" while 100 indicates "extreme greed."
Generally, an extremely low score indicates the market is close to its bottom whereas an extremely high score indicates it is close to the top.
The indicator is formed from a variety of data sources, including volatility (25%), market momentum (25%), social media (15%), surveys (15%), dominance (10%) and trends (10%). Together, these form a single score that gauges the overall sentiment in the market.
Historically, the index reached its highest levels when the total market capitalization of the cryptocurrency market neared its peak, while the reverse is true when Bitcoin approached its bottom.
In August 2023, CoinMarketCap launched our very own Crypto Fear and Greed Index. Instead of most Fear and Greed Indices which focuses on Bitcoin, CMC's index covers the sentiment of over 20,000 coins listed on CMC. The index looks at five different factors to calculate the score: Price momentum, volatility, derivatives market, market composition and CMC’s proprietary data.
The Bitcoin Rainbow Chart
The Bitcoin Rainbow Chart, as its name implies, is a rainbow-like chart formed of a simple logarithmic regression that maps the evolution of Bitcoin's price over time. The chart superimposes Bitcoin's historical price on a colored chart, with bands indicating whether it is likely near its top or bottom.
The closer the price moves into the red territory, the more likely the top is, whereas the closer it moves to the blue territory, the more likely it is to approach the bottom. As you can see, the price tends to reverse sharply after Bitcoin’s price enters the orange and red territory.
The chart is formed using historical data and there is no scientific basis for it, but many traders still use it to forecast Bitcoin’s price well into the future.
The rainbow chart may provide some value to those looking to determine their optimal entry and exit points for Bitcoin and other Bitcoin-correlated digital assets.
Besides the Bitcoin Rainbow Chart, there is also an Ethereum Rainbow Chart.
Learn how to use the Bitcoin rainbow chart!
Ichimoku Cloud
The Ichimoku Cloud uses multiple lines projected forward in time to visualize support and resistance.
The entire indicator is built around these five lines:
(1) The Conversion Line or Tenkan-sen: A moving average of the previous nine candlesticks.
(2) Base Line or Kijun-Sen: A moving average of the previous 26 candlesticks.
(3) Leading Span A or Senkou Span A: The moving average of the conversion and base lines, projecting 26 periods into the future.
(4) Leading Span B or Senkou Span B: A moving average of the past 52 candlesticks, projecting 26 periods into the future.
(5) Lagging Span or Chikou Span: The closing price of the current candlestick projecting 26 periods into the past.
As can be seen in the image above, based on whether of the leading spans A and B is higher than the other, the space between them has been colored. When the leading span A is higher than the leading span B, the cloud is green; when it is the other way around, it is red.
The Kumo Cloud, a special characteristic of the Ichimoku system, is the name given to this colourful region. Considering that the cloud is employing 26 candlesticks, it has special forecasting insights.
When the price trades above the Cloud, it signals an uptrend. The Cloud acts as a support zone during upward trends. If the price drops below the Cloud, it indicates that the uptrend has lost momentum and a downtrend may have begun.
Learn how to trade crypto using Ichimoku Cloud!
When and How To Take Profit?
Knowing when to take profits is essential for cryptocurrency traders aiming for good returns. While the core objective is buying low and selling high, the challenge lies in pinpointing ideal moments to realize gains by exiting positions. Despite indicators signalling peaking markets, exiting amid ongoing buyer enthusiasm can prove psychologically difficult.
To navigate these scenarios, seasoned traders employ strategies including:
- Taking Partial Profits at Price Milestones: Rather than cashing out an entire position all at once, traders can scale out portions along the way up. This allows locking in some gains while leaving room for further upside.
- Using Trailing Stop Orders: Stop orders can be used to sell automatically if the price drops below a defined threshold after rallying. The stops "trail" the price at a set percentage or dollar amount.
- Booking Gains With Rapid Surges: Parabolic rallies in crypto often correct sharply. Taking profits after exponential gains preserves capital for the next setup.
Combining Multiple Indicators
While individual indicators like RSI may produce false signals, combining several top and bottom indicators can improve accuracy and validate developing trends. Some ways to make use of multiple metrics include:
- Requiring two or more indicators to align before taking action. For example, waiting for the elevated RSI and Pi Cycle Top crossover before selling.
- Evaluating indicator clusters or frameworks. Some tools like the Fear & Greed Index combine multiple indicators into a composite score.
- Looking for confirmation between momentum and trend oscillators. Combining RSI and MACD or stochastic indicators can confirm tops and bottoms.
- Comparing short, medium and long-term indicators. Indicators across different timeframes can determine the longevity of a trend.
- Considering volume and volatility signals. Unusually high trading volumes and volatility often accompany trend turning points.
When top signals begin to stack up across different indicators, especially those using diverse data sets and methodologies, it lends more confidence that a local top may be close.
Backtesting Top Signals
Backtesting involves applying trading strategies or indicators to historical market data to evaluate their viability. For cryptocurrency traders, backtesting tools and techniques can be useful for fine-tuning top and bottom indicators like RSI and Pi Cycle Top.
By replaying past price action across a range of market conditions, traders can analyze how effectively different indicator settings and combinations identify tops and bottoms. For example, testing RSI using thresholds from 65 to 85 can reveal the optimal overbought level for signaling tops.
The best backtesting approaches use accurate historical data across long time periods. With sufficient data, traders can backtest top and bottom signals across entire market cycles to assess performance.
Effective backtesting also requires realistic simulations of real-world trading conditions. Factors like slippage, spreads and fees should be incorporated for more accurate results.
Traders can compare performance using metrics like the percentage of winning trades, profit factor, drawdown and Sharpe ratio. The most predictive indicators will perform consistently through various market environments.
While past performance does not guarantee future results, traders who diligently backtest strategies have an advantage in deploying techniques empirically demonstrated to fit their risk profile and profit goals. Along with using indicators, backtesting also helps develop intuition and experience for interpreting signals when actively trading. As always, the indicators and strategies mentioned above is not financial advice and is purely for educational purposes. Always do your own research (DYOR) before investing or trading any cryptocurrencies.
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