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5 Key Indicators Used by Traders for Technical Analysis
5 Key Indicators in Technical Analysis
Cryptocurrency
15.09.2021
Updated 11.03.2022
10:41

The use of technical indicators allows traders to receive extra data about the nature of the quote changes as well as make predictions and understand the market conditions. Indicators significantly simplify defining of many widespread patterns and models; based on the information they provide, some traders purchase or sell assets.

Many indicators may be successfully applied during exchange trading: starting from day trading to long-term investments. There are a lot of examples when experienced traders refused to use traditional tools for analysis at all, creating their indicators. And they made money on it. In the material of the publication, we briefly described the most popular indicators used for technical analysis. They may supplement the tools of both a novice and a trader with experience.

1. RSI (relative strength index)

Relative strength index or RSI is an impulse indicator. On the basis of the data that this indicator reflects, you can make a conclusion whether a specific asset is overbought or oversold. The principle of the indicator’s work is to measure the value of the asset cost dynamics within the preceding periods (days, weeks, hours). RSI is an oscillator. It shows the mentioned indicators measured by an indicator. The value range that an RSI may accept is 0-100.

The belonging of this indicator to the group of impulse indicators is explained by the fact that an oscillator reflects the degree of the cost change of this or another asset. The increase of indicators provided that the level of the asset cost is increased allows telling about traders’ interest. If the indicators are reducing while the cost is growing up we can say that the market is going to be taken by sellers. RSI interpretation is a set of the digital indicators of the line on the chart. In general, when the line exceeds the mark of 70, we can tell that the asset is overbought. If the line goes lower than the mark of 30, we can say that the asset is oversold. However, one shouldn’t consider the values of an oscillator as direct signals. The thing is that an indicator may provide false signals. It’s recommended to use RSI combined with other tools.

2. Moving average (MA)

Moving average is a tool that smoothes the cost fluctuations, filters noise, and extracts the trend direction. MA as the tool based on the data of previous periods, that’s why it relates to the group of delayed indicators. The longer the chosen period is, the higher signal delay will be.

The most widespread moving averages are the SMA and EMA. The first one is a simple moving average; the second one is an exponential moving average. SMA is the line formed (built) on the basis of data within a specific period as well as based on the data on the average value of the set parameter.

EMA is based on the latest data. It contributes to the indicator sensitivity to the recent cost fluctuations of this or another asset.

The example of use: the intersection of the 200-day SMA by the 100-day SMA. That is a signal to sell. It is being interpreted the following way: the average asset cost within the last 100 days is lower compared to the cost within the preceding 200 days. Thus, short-term tendencies don’t follow the long-term ones, which is a signal to sell.

3. MACD (convergence и divergence of moving averages)

Moving average convergence divergence is a technical analysis indicator used to predict how the asset cost will act in the future. The MACD provides for the link of two moving averages. It is a MACD line and a signal line. The first one is calculated by the deduction of EMA in 26 days from EMA in 12 days. Later the result is displayed above the exponential moving average in 9 days. The latter one is a signal line.

Using the data of the indicator, a trader can make a conclusion about how powerful the current trend is. An example: the asset’s cost updates the annual maximum, but MACD shows low results. In this case, we can say about a high probability of reversal.

One more example: a signal to buy is considered to be the moment of the intersection of the signal line up by the MACD line. The principle works out in the opposite direction too, that is, you can start selling when the MACD line intersects the signal line from above.

Quite often, experienced traders combine this indicator with RSI.

4. Stochastic oscillator

A stochastic oscillator is based on price tracking. It operates on the principle of a standard RSI, being a derivative tool. It also allows revealing a fact whether a specific asset is overbought or oversold. The data from the stochastic oscillator is formed based on the basic indicators. The calculations of the indicator are made via applying a formula of a stochastic oscillator to the RSI values.

The set-ups of this tool may be set in a range from 0 to 100 (0-1). By default, they are the following: 20 and 80 (0,2 and 0,8). These are the lowest and highest borders respectively.

The stochastic oscillator is characterized by high sensitivity. It provides its ability to generate various and difficult-to-interpret signals. In general conditions, a stochastic oscillator is useless when its indicators are within the highest or lowest borders of a set range.

An example: when the stochastic oscillator represents the value higher than 0,8 (80), it’s possible to say that the asset is overbought, and when the value is lower than 0,2 (20), it means that the asset is oversold.

Like in the case of using a relative strength index, you shouldn’t consider the indicators of a stochastic oscillator to be a 100% correct signal to buy or sell. There are no guarantees that the price will go up or down. You should also take into account the already mentioned high sensitivity of the stochastic oscillator. It leads to the situation when many signals generated by it are false. For this reason, this tool is recommended to use only in combination with other tools and methods of market analysis.

5. Bollinger Bands (BB)

Bollinger Bands or BB is an indicator using which you can define volatility. Also, some traders apply it to find out whether a specific asset is overbought or oversold.

BB is an aggregate of three lines. These are SMA (average) as well as upper and lower lines. The adjustments can be set based on the market situation. However, generally, the borders (upper and lower lines) deviate from the moving average by two deviations. The distance between the lines depends on the volatility. It changes if the volatility changes as well.

An example: the closer the price to the upper border of the indicator, the higher probability that the asset is overbought. Otherwise, it’s possible to say that the asset is oversold.

It is often that the price doesn’t go beyond the borders of upper or lower lines, however, such a situation is possible. The price that breaks one of the borders is not considered as a signal to buy or sell by traders, however, such a situation allows to tell about extreme market conditions.

A situation when the indicator shows compression is possible. In this case, it is best to say about a low level of volatility. All the lines will be in a close placement to each other. The indicator may be useful to define the volatility level in the future when the lines are set close regarding each other. The opposite situation allows saying about the possibility of reducing volatility.

Conclusion

Indicators for technical analysis are the tools with the use of which you can receive information about the market situation. By taking them into consideration, it’s vital to remember that all the data received via indicators are subjective and shouldn’t be considered as signals to enter or leave the position.

Before opening or closing the position, you need to analyze the data from several indicators, use the tools of graphical and fundamental analysis. In this case, the chances to succeed will be much higher.