By Larry Wright
Introduction
Investing is more a science than an art. Professional and successful investors refrain from depending on their luck and place their trading bets using technical analysis. Technical analysis is the method of using different mathematical calculations and indicators to measure market performance and find out the trajectory of a trading product. No one can predict the future.
However, by using technical analysis, traders can understand the market movements more effectively and make informed decisions about their portfolios.
What is a Technical Indicator?
Technical Indicators are the tools for performing technical analysis. Technical analysis is the method of using technical indicators to measure the performance of an asset.
A technical indicator is an instrument that enables traders to measure aspects such as volume, price, patterns, and trends that can affect the performance of a trading asset such as cryptocurrencies.
Traders use technical indicators to predict future market movements and issue projections based on the results. There are several different types of technical indicators, and by learning about their application and formulas, investors can learn to read the market pattern and trends more clearly.
Types of Technical Indicators
Depending on their functions and uses, there are four basic classifications of Technical indicators. Investors should keep in mind that each type consists of several technical indicators to measure the same value of its category:
Trend Indicators
There are two types of trends for any given asset in a market, namely bullish and bearish. However, without having any information or analytical tool, an investor cannot figure out the next move in the market.
Therefore, trending technical indicators allow investors to use averaging baselines. It means that investors use trend indicators to establish a baseline price point so that they can use that as a reference for an increase or decrease in the price.
When the averaging baseline is created, investors can predict a bullish movement if the price of the asset goes above the averaging baseline. For the bearish movement, vice versa applies. Trend indicators are most popular among investors who possess a mid to long-term investing period.
Momentum Indicators
Momentum Indicators are used by investors to find out the speed of price momentum for any asset. Investors are aware that the price of a given asset class is going to move upwards or downwards over time.
However, if the investors can properly measure the speed of this uptrend or downtrend, they can place winning trading bets more accurately. Therefore, technical momentum indicators allow investors to measure the find out this important information.
Some of the most popular momentum indicators are RSI and Stochastic Oscillators, among others.
Volatility Indicators
Volatility is a term that investors often hear when they are present in the trading ecosystem. Volatility refers to price fluctuation and its frequency. The assets that experience more frequent price changes are called highly volatile.
On the other hand, the assets that retain their prices for a longer duration are referred to as stable. Therefore, investors use volatility indicators to measure the variations without giving way to the changes in the price movement. The investors need to use the data from the highest to lowest points as reference points.
In this manner, the investors can create long or short positions depending on the variation frequency. Bollinger Band is a great example of a Volatility Indicator.
Volume Indicators
Volume Indicators are one of the most common types of technical tools used by investors. However, volume indicators are not used for measuring the volume or the quantity of an asset.
On the contrary, Volume Indicators are used to measure the strength of an ongoing trend. It means that these indicators enable the investors to understand how long the current trend is going to last.
At the same time, investors can also use volume indicators to predict trend reversal points with higher accuracy. Some of the most important volume indicators are based on balance volume and volume rate of change.
Origin of Technical Indicators
The use and origin of Technical Indicators can be traced back to Dow Theory creator named Charles Dow. Charles Dow put together Dow Theory in the 1800s as a way to quantify trading practices.
Later on, important researchers like John Magee, Robert Rhea, William P. Hamilton, and Edson Gould improved the Dow Theory and introduced several new technical indicators to improve the method of technical trading for investors.
At present, there are hundreds of defined patterns and signals that are used to perfect the process of trading. However, investors should keep in mind that using one or two technical indicators alone is not going to give them all the answers.
Therefore, investors have to use a combination of a suitable array of technical indicators to make more accurate trading predictions. At the same time, investors must understand that even the top technical analysts cannot predict the price movement for a given market with perfect accuracy because it is impossible to predict the future.
However, when investors use technical indicators, they can eliminate the chances of losses and mitigate trading risks by a considerable percentage. Therefore, depending on technical analysis and indicators is advisable rather than depending on market speculation and instincts when it comes to trading successfully.
Differences Between Fundamental and Technical Analysis
Many investors are caught between the fine lines between fundamental and technical trading. By understanding the main difference between the two trading tools, investors can refine their skills of deduction and hone their analytical prowess. Here are some of the most important differences between fundamental and technical analysis:
Scope
The scope of fundamental analysis is broader in comparison to technical analysis. The fundamental analysis concerns itself with the macro-level information, such as the overall finances of a company or a blockchain network.
On the other hand, technical analysis is a more detailed and personalized study of a trading asset. It means that the technical analysis focuses more on microelements, such as price movements of an individual stock or cryptocurrency, rather than analyzing the entire trading market.
Trading Styles
Since fundamental analysis is not concerned with minor details regarding an asset, it means that the investors who use this option often create short-term positions. It is also important to note that fundamental analysis is a powerful tool to measure market dynamics; however, it is nearly impossible to create successful long-term trading positions using only fundamental analysis.
On the contrary, long-term investors always create their trading strategies using technical indicators and technical, analytical tools. Therefore, all the trained and professional investors take their time to learn all technical indicators and have a higher success rate.
However, investors should keep in mind that a solid long-term or short-term trading strategy is made up of a mixture of both technical and fundamental indicators.
Functionality
The design of fundamental analysis allows the investors to locate the ideal undervalued or overvalued asset. In this manner, the investors can identify the ideal position for long or short-term trading positions.
Depending on overvalued or undervalued status of the asset, investors can create long or short positions based on fundamental analysis. On the flip side, technical, analytical tools help investors trace the pattern of developments. Investors can create a detailed report about the trend movements in either bullish or bearish directions and locate the trend reversals based on historical data.
Hence the traders can create enter or exit trading positions by understanding the trend repetitions and reversals using technical indicators.
Expertise
Fundamental indicators are mostly based on macroeconomics and the most visible market dynamics. Anyone with educational background can understand FA using their deductive and reasoning skills.
Therefore, using Fundamental Indicators does not require formal training, and anyone can use them with little knowledge and research. On the other hand, Technical indicators are more refined tools that are aimed at measuring the finest details regarding asset class. It is not correct to interject those technical indicators are impossible to understand, but they can take more time to learn and master.
Furthermore, technical indicators have more variety, and therefore investors can perfect them by consistent studying and practical trading experience.
Importance of Technical Indicators
Most people are not aware of managing their finances because students are not provided with any financial education in schools. Therefore, most people grow up without realizing the importance of managing their finances.
As a consequence, most people are scared of investing their savings, or they end up losing money due to a lack of financial education. This is the main reason that technical indicators are so important. Most people hear about cryptocurrencies for the first time from social media sites.
There is a lack of understanding about the applications of blockchains and the technical benefits of cryptocurrencies because they are new inventions. Scammers and fraudulent actors take advantage of the lack of awareness among the masses and trick them into losing their money by presenting cryptocurrencies as a get-rich-quick scheme.
Cryptocurrency returns are indeed bigger than regular stocks and commodities. However, if an investor put their savings into cryptocurrencies based on market speculation, they have a 99% chance of sustaining losses even if the cryptocurrency has performed properly.
Under such circumstances, the importance of technical indicators becomes most apparent. If investors base their trading decisions on technical indicators and proper market research, they stop scammers from stealing their savings.
Furthermore, these investors would be able to dodge the market risks and prevent losses due to herd mentality. Therefore, every cryptocurrency investor must learn about technical indicators and their uses before diving head-first into cryptocurrency trading.
Top 15 Technical Indicators for Cryptocurrency Investors in 2022
The basic classifications of Technical Indicators have already been discussed. However, if the investors wish to use technical indicators, they need to familiarize themselves with different types of technical indicators present in the four categories:
Momentum or Oscillating Indicators
Momentum indicators focus on increasing and decreasing the value of a trade product. Usually, bullish market signals are more coherent with momentum indicators than bearish signals. Here are some of the most popular momentum indicators that every cryptocurrency trader should know about:
Relative Strength Index/RSI
RSI, or Relative Strength Index, is used to measure the bullish or bearish tendency of an asset. It means that RSI is used to find out the momentum of the price for an asset. If the RSI for a cryptocurrency is 70 or greater, it indicates that it is overbought.
On the other hand, if the RSI for an asset class is 30 or lower, it means that it is oversold. The ob/os levels for an asset are determined through the momentum of its historical price movements. Analysts can work out minute trading details such as time entries, trends, and support/resistance forces for an asset using RSI.
Stochastic Oscillator
Stochastic means a random probability distribution that can be vaguely measured using statistics. However, a Stochastic Oscillator is another useful technical indicator to measure whether an asset is overbought or oversold.
It is determined by comparing the latest closing price of one asset and comparing it with the price spectrum of its contemporary under the pretext of a defined trading period. Investors can adjust the SO range between 0-100 to account for the market volatility factors. It is often used in tandem with RSI, but it can highlight the trend reversals more distinctly.
Stochastic Oscillators are denominated in the form of two-line waves accounting for the value of each session. It is also a 3-day moving average.
MACD
Moving Average Convergence Divergence or MACD is a technical indicator that is used for comparing two Moving Averages. It is important to note that divergence is a phenomenon when two moving averages part ways with each other while convergence indicates their nearing.
The comparative analysis between these two diving and remerging patterns allows the investors to understand if the price movement is getting stronger or weaker. MACD is also used in combination with RSI, and it is very popular among Swing Traders.
Ichimoku Kinko Hiyo
Ichimoku Kinki Hiyo is a technical indicator from the land of the rising sun. Investors can get a more comprehensible sense of this indicator using digital graphics that track monthly, weekly, and daily trading activities. The IKH indicator considers four different trading periods for comparative analysis.
One of these trading periods averages the maximum and interval of minimum prices, and it is further split into half. This indicator takes a gander at the price of a cryptocurrency concerning market movement. When the spot price of the asset under question is higher than the indicator, it means that it keeps going to rise.
Commodity Channel Index
Commodity Channel Index is a type of oscillating indicator that compares the latest price of an asset with its historical price average. This is a very useful indicator that keeps updating constantly and allows investors to measure the difference between the historical price average and the current price.
Therefore, traders use this index to know if the asset is going to maintain its current trend or not.
Volume Indicators
Volume Indicators are famously used to measure the strength of the current trend. However, Volume indicator variations can highlight a wide variety of trending qualities. Here are some of the most important Volume Indicators for investors to associate entry or exit signals with accuracy:
Average Volume
The average volume is calculated by taking a specified trade bracket from a crypto chart and dividing it by the total number of bars in the same duration. It is the simple mean calculation or moving average, usually ranging between 14 days to a few weeks.
Volume Momentum
This indicator measures the relationship between the price and volume of an asset within a specified trading period. Volume momentum will allow the investors to see how the price change of an asset is faring under the influence of volume changes in comparison to the baseline price.
Volume Momentum reveals the negative or positive opening for a crypto asset on account of its volume variations.
Chaikin Money Flow
Chaikin Money Flow is another indicator aimed at measuring the overbought or oversold status of a cryptocurrency. Analysts will work out the value of asset strength by measuring the total inflow or outflow during a specified trading bracket. The Chaikin Money Flow typically employs price data from 14 periods to deliver the final measurement.
Force Index
Force Index is a type of reference line index. It is represented in the form of a wave meandering between three lines. The rise above the centerline indicates that the power of assets or the prices is likely to keep rising and vice versa.
It is used to measure the bullish or bearish tendency of a cryptocurrency. The three lines of the Force Index indicate its three components, namely direction, range of price change, and trading volume.
Volatility Indicators
As the name suggests, volatility indicators are used by technical market analysts to measure price changes. Here are some of the most popular and useful Volatility Indicators to help investors predict trend reversals based on the highest and lowest historical prices:
Bollinger Bands
Contrary to the popular belief, Bollinger Bands do not indicate breakout points. The main purpose of Bollinger bands is to measure the amount of price volatility of an asset. Furthermore, Bollinger Bands can also point out the periods where the trading volume is most dense.
Therefore, investors can deduce a possible breakout area using these readings. Bollinger Band takes reference from the historical highs and lows for an asset. When the band starts to move apart, it means that volatility increases and vice versa.
Average True Range/ATR
ATR is another tool for measuring the volatility in an asset. It does not track the price movement of an asset; rather, it considers the price gaps to calculate asset movements. ATR can measure the degree of volatility using averages or specified time frames. It was reserved for commodity markets, but now it has been added to the indicator arsenal of crypto and equity traders. It is used to find suitable entry points and set stop-loss limits.
Parabolic Stop and Reverse
This technical indicator is also known as Parabolic SAR Indicator. It is one of the most popular analytical tools for Day Traders. Analysts use this for clarifying the direction of price for an asset and predicting a possible trend reversal. Therefore, investors can use this indicator to identify the entry and exit points.
Keltner Channel
The Keltner Channel is another band-like chart that tracks the price movement of an asset using three lines. The upper and lower lines indicate bullish and bearish trends, respectively.
On the other hand, the middle line is made from the exponential moving average or EMA. It is worth mentioning that EMA is a type of moving average that emphasizes the latest price changes. This indicator can be used to measure the volatility, and the price mean for the cryptocurrency.
Trend Indicators
Trend Indicators are used to determine the continuation or stoppage of an ongoing trend for an asset. Here are some of the most popular and widely used Trend indicators to determine the direction of the market and identify the reigning trend:
Volume Indicator
Volume Indicator is as simple as measuring the health of the market based on demand and supply dynamics. For example, when the trading volume for an asset increases, it signifies positive market activity and a rise in demand.
Moving Averages
Moving Averages are one of the most applicable indicators among traders. They are used to create a baseline and reference point to measure the positive or negative movement for an investment option.
The most popular moving averages are Simple Moving Average (SMA), Smoothed Moving Average (SMMA), Exponential Moving Average (EMA), and Linear Weighted Moving Average (LWMA), among others. Depending on the trading periods Moving averages can also be divided into short-term types such as 21-day MA, intermediate or 50-day MA, and long-term or 200-day MA, among others.
Conclusion
Technical indicators can look complicated to comprehend at first glance. However, by conducting a detailed study of these analytical tools, everyone can learn to upgrade their trading abilities.
Investors should always use a combination of technical indicators, create a trading plan, perform back-testing, and work under the supervision of a trained broker until they gain some experience in this regard.
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