By Larry Wright
Introduction
Trading and investing are methods to mobilize savings and generate more profits using your savings. In most cases, people tend to work a job to earn money for their daily expenses. However, most people can set aside their additional income in the form of savings. Due to the lack of financial education, most people do not realize that their savings are going to devalue with time.
However, those with enough insight into the financial system can invest their savings to earn profit and avoid the negative impact of inflation. This article will allow the investors to learn about the technical analysis and key indicators crucial for trading.
What is DeFi?
Before 2009, most investors used available investment options such as commodities, stocks, bonds, options, real estate, etc. However, in 2009 Satoshi Nakamoto introduced the Bitcoin blockchain to start DeFi, or decentralized Finance ecosystem.
DeFi is a type of monetary exchange and trading option that can exist outside of the centralized financial network. It increases financial participation among the masses and allows small-scale investors to take advantage of trading options. DeFi is based on borderless currencies called crypto tokens or coins for trading.
What is DeFi Trading?
In addition to working as an independent financial network, DeFi systems such as blockchains are also able to allow users to perform trading. The investors can sell, purchase, borrow, lend, and arbitrage cryptocurrencies using different crypto platforms such as CEXs and DEXs.
Cryptocurrencies like Bitcoin were introduced as an alternative to traditional legal tenders. Over time more financial enterprises have started to participate in DeFi trading and offer DeFi investment options for their clients.
DeFi traders also need to use technical analysis and statistical research on the market with the available data to gauge the market dynamics and make the best investment decisions.
What is Technical Analysis in Trading?
Technical Analysis is the way to quantify trading data and make careful predictions about market performance. Both traditional and cryptocurrency investors use technical analysis tools and techniques to improve their trading practices.
For example, two investors are trying to purchase a new cryptocurrency. Mr. A wants to purchase the same amount of cryptocurrencies as his lucky number.
Meanwhile, Mr. B will use the data available in the market or blockchain to understand the cryptocurrency performance and make his purchases based on the statistical results.
Mr. B is more likely to earn profits from his cryptocurrency purchases because he used a more practical and logical approach. Technical Analysis allows cryptocurrency traders to avoid placing blind bets in the market and use historical and real-time data from the market to come up with better projections.
Without technical analysis, cryptocurrency or any other type of trading will be merely like sports betting. Therefore, professional brokers are well-versed and trained in technical analysis of the market to manage risks and increase their profit production.
What is a Key Indicator?
An indicator is a type of measure or scale for trading markets that allow the investors to gauge a particular feature of the market. For example, the Fear and Greed Index is a key indicator for measuring the trust level of investors towards a particular cryptocurrency.
Just like traditional money or stocks, a cryptocurrency or DeFi coin needs to maintain a healthy level of goodwill among the traders. If the investors do not have good faith in the viability of a cryptocurrency they will try to sell it ASAP which can result in a massive price crash.
In this manner, different technical indicators allow investors to measure and understand different aspects of the cryptocurrency market.
How Do Key Indicators Work?
Key Indicators are essentially like mathematical formulas. These formulas are designed to measure a particular quality of the market that can impact the market value of a given cryptocurrency.
DeFi market key indicators can take reference from the stock market and economic rules. For example, some indicators allow investors to measure the total number of active traders for a cryptocurrency to calculate the demand and supply forces. Even though, indicators are mathematical formulas they are not very difficult to understand.
Cryptocurrency investors who wish to make rational investment decisions and maximize their trading potential can start from the most important key indicators and move to advance technical tools gradually.
Creation of Key Indicators
Trading Indicators are created by economists, accountants, brokers, mathematicians, and sometimes expert investors. The first documentation of financial technical analysis was found in the business books of Dutch merchant Joseph de la Vega in the 17th century.
Meanwhile, in Asia, the first recorded investments calculations are traced back to Japanese rice merchant Homma Munehisa in the 18th century who also used the candlestick method.
During 1851-1902, Wall Street Journal reporter Charles Dow compiled, calculated, and printed data from American Stock Market. He also identified recurring market patterns and presented Dow Theory for stock market price movement.
Until 20th Century a massive number of accountants, reporters, bankers, and stock market traders perfect and advanced technical analysis techniques and created several new key indicators for investors. DeFi investors should always verify the technical market predictions and check the authenticity of indicators before following them.
How to Access Key Indicators for DeFi Trading?
Before the availability of the internet, an average person couldn’t get access to technical analysis tools. The only people who could perform technical market analysis were those with formal education and training. However, today there are many online trading applications.
Most of these trading platforms also offer automated and free technical analysis tools such as basic market indicators. It is important to note that key indicators do not give a direct answer about the next change in the market. The investors need to understand what each key indicator represents and make their decisions based on the projections from those results.
Therefore, it is not enough to have automated key indicators the investors must learn what they represent and how to use them effectively.
The best way to get started is to learn what the basic and free indicators are used for. Online trading platforms allow investors to upgrade to higher account services to unlock the advanced technical indicators from medium to premium scale.
With DeFi trading, the investors also have the option to extract on-chain data directly from the blockchain and use it to perform individual calculations. There are also stand-alone key indicator calculator services available that are designed and used by professional brokers.
At the same time, the investors can also opt for cryptocurrency data aggregators that collect real-time data and archive authentic on-chain and off-chain data projections from the DeFi ecosystem.
7 Most Important Key Indicators for DeFi Traders
Many DeFi investors are hesitant to get started with cryptocurrency trading because they assume that technical analysis is very complicated. The reality is that just like any other skill using key indicators for DeFi trading is also a learnable technique.
When an investor is just getting started their cryptocurrency portfolio is going to be smaller. Therefore, using the most basic key indicators is going to be enough for them. On the other hand, as traders can gain more experience with DeFi trading they are likely to grasp the advance key indicators as well.
Here are 7 most important key indicators for DeFi trading that every cryptocurrency investor should know:
Inflation Rates
The Inflation Rate is a key indicator that enables the DeFi investors to understand the complicated relativity of token supply and token price. There are many cryptocurrencies such as Bitcoin that are known for a limited supply.
Investors tend to purchase Bitcoin because it is always going to remain in demand and keep increasing in value on account of limited supply. However, most cryptocurrency investors who are unfamiliar with the inner workings of the token supply assume that a limited supply token is going to remain lean in the long run as well.
However, the reality is that many blockchain networks plan to keep minting new tokens such as Ethereum. On the other hand, inflation of price resulting from the limited token supply is great for the investors. However, if the inflation rate increases beyond control it can backfire.
Therefore, the Inflation Rate is a key indicator that allows cryptocurrency investors to make sure that the inflation ratio remains within healthy and acceptable limits. It is worth noting there are not any constant values or ranges to indicate a useful inflation rate. Cryptocurrency investors must work out the suitable range in real time based on the latest market dynamics and situations.
Total Value Locked
Liquidity is an important market value that indicates the number of available liquid assets present in an exchange market at any given time. When there is more liquidity in the market, it means that the investors who are holding a particular DeFi token can sell or purchase the DeFi token without facing any obstacles.
Total Value Locked or TVL is a key indicator to measure the liquidity ratio or the number of staked tokens available in a DeFi trading platform. For example, the total number of ADA locked on the Cardano blockchain indicate can be represented as TVL.
TVL is a multi-dimensional indicator that allows investors to measure different types of liquidity. For example, it can also measure the number of staked tokens on a blockchain or the total liquidity available on different DEXs and CEXs on a blockchain network individually and collectively.
TVL is also useful for allowing investors to understand the demand for a given cryptocurrency. By comparing the TVL readings of different cryptocurrencies investors can highlight the change in demand for each investment option.
Non-Speculative Usage
Non-Speculative Usage is a key indicator that is very useful for investors to find out the underlying or intrinsic value of a cryptocurrency. There are millions of cryptocurrency variants available on the internet.
However, a huge number of these cryptocurrencies do not offer any practical use for their consumers. Therefore, even if a highly speculative token is trending among cryptocurrency investors and gaining prices the chances of its sudden crash are very probable.
Take, for example, a highly speculative token called Squid token that was inspired by the famous Netflix series called Squid Games. However, the token had no real use case and it turned out to be an elaborate pump and dump scheme eventually that resulted in massive losses for lots of traders.
The non-speculative usage indicator allows the investors to measure the usage of a cryptocurrency outside of decentralized and centralized exchanges. For example, cryptocurrencies like ETH have considerable usage as the network supports dApps.
Price-to-Sales Ratio
Price-to-Sales Ratio or P/S Ratio is a DeFi key indicator that is used by cryptocurrency investors to determine whether a token is undervalued or overvalued. When an asset is undervalued it can point out the best time for purchasing it before it gains more value.
On the other hand, if an asset is overvalued it means that the time for acquiring more is not ideal and those who wish to cash out the profit can sell it for maximum profits. P/S ratio is also used for finding out the current price positioning of traditional investment options such as stocks.
Anyone, who wished to find out the P/S value, can do so with a simple formula. Investors can calculate the Price-to-Stock ratio by dividing the total market cap of a cryptocurrency by its realized profits or revenue. If the resulting answer is lower or negative it means that the cryptocurrency is currently undervalued and vice versa.
However, DeFi investors should know that the P/S ratio is not a definitive way to find out the undervalued or overvalued nature of a cryptocurrency. At the same time, it is a good tool for traders who are just getting started.
Unique Address Count
Unique Address Count is one of the most important DeFi key indicators. At any given time, a DeFi investor must keep watch on the amount of invested interest in a particular cryptocurrency.
If there are not a considerable number of unique and real-time traders using the given cryptocurrency in real time it can mean that the collective interest in the cryptocurrency is dropping. If the interest in a cryptocurrency drops it can result in a sudden price crash and leave the cryptocurrency holders with massive and unredeemable financial losses.
Therefore, key indicators like Unique Address Count are very useful for DeFi investors. However, the investors need to understand that just like all key indicators they should not rely on the results from Unique Address Count only.
A developer can create fake trading accounts using trading bots on a DeFi protocol. Under such circumstances, the results from Unique Address Count are not enough to determine the true demand for a given asset in a particular DeFi protocol. Therefore, investors should always depend on a multitude of key indicators to ascertain any market factor.
Exchange Token Supply
Token Supply is one of the most fundamental key indicators for DeFi Investors. Cryptocurrency investors sell and purchase tokens from CEXs or DEXs. The DeFi tokens available on cryptocurrency exchanges are minted tokens that are ready for sale or purchase.
Therefore, Exchange Token Supply is a gauge that is essential for investors to find out whether their cryptocurrency reserves are going to climb in value or take a dive.
Most cryptocurrency investors prefer Centralized exchanges for making sales and purchases as they are considered more secure than DEXs.
Therefore, it is ideal to look out for the Exchange Token Supply on a CEX in particular. If the token supply for a cryptocurrency increases on one exchange it does not always result in massive selling pressure.
Therefore, the investors should learn to use the Exchange Token Supply Indicators with all its denominations and make room for adjustments based on other data. Sometimes, whales may keep their cryptocurrency reserves in external accounts that can impact the output of Exchange Token Supply.
On the other hand, some investors might use their cryptocurrency reserves for staking, collaterals, futures, and margin trading. It means that they would not be able to take out their reserves before a specified time. By accounting for all the factors that can alternate the results for Exchange Token Supply investors can unlock the real potential of this important technical analytics tool.
Exchange Token Balance
Just like the Exchange Token Supply, Exchange Token Balance is also an important key indicator. This indicator allows the investors to constantly monitor the fluctuations in the token reserves of a CEX or DEX.
If the token balance for a cryptocurrency is depleting faster than before within a specified trading period, it can indicate that whales and other investors are rapidly acquiring the cryptocurrency. It is important to note that in comparison to DEX, the Exchange Token Balance data from a CEX is more reliable as it is considered a more secure channel for cryptocurrency trading.
Conclusion
It is not possible for the best cryptocurrency trading experts to accurately predict the market outcome with 100% accuracy. However, by using a combination of key indicators and other technical analysis tools anyone can increase their investment practice by many folds.
Rather than placing blind and speculative bets on cryptocurrencies, it is best to spare a little time and understand cryptocurrency key indicators that allow investors to improve their chances of turning up profits and mitigating risks.