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5 Main Indicators Used in Technical Analysis

TL;DR

Indicators are the weapon of battle-tested technical analysts. Each player will choose the tool that best suits his unique game style, and then learn to hone his skills. Some people like to observe market dynamics, while others like to filter market noise or measure volatility.


But what are the best technical indicators? Well, every operator will tell you something different. One analyst will swear that this will be the last indicator, while another analyst will reject it altogether. However, here are some very popular ones (RSI, MA, MACD, StochRSI and BB).


Do you want to know what they are and how to use them? Continue reading.


Introduction

Traders use technical indicators to get more information about changes in asset prices. These indicators can easily find patterns and signals for buying and selling spot in the current market environment. There are many different types of indicators, and they are widely used during the day. Traders, swing traders, and sometimes even long-term investors. Some professional analysts and senior traders even create their own indicators. In this article, we briefly outline some of the most popular technical analysis indicators that can be used in any trader's market analysis toolkit.

1. Relative Strength Index (RSI)

The RSI is a momentum indicator that measures the magnitude of recent price changes to determine whether an asset is overbought or oversold (the default is the last 14 time periods, that is, 14 days, 14 hours, etc.). Displayed as an oscillator with a value ranging from 0 to 100.


Since RSI is a momentum indicator, it shows the speed of price change (momentum), which means that if the momentum increases during the price rebound, the upward trend is strong and more and more buyers enter. Conversely, the downward momentum as prices rise may indicate that sellers are about to take over the market.


The traditional interpretation of RSI is that if the asset is higher than 70, the asset is overbought, and if it is lower than 30, the asset is oversold. Therefore, extreme values ​​can indicate an impending trend reversal or retracement. Treat these stocks as direct buying and selling signals. Like many other technical analysis (TA) methods, RSI can give false or misleading signals, so it is always helpful to consider other factors before entering a trade.

2. Moving Average (MA)

Moving averages smooth the price movement by filtering out market noise and highlighting the trend direction. Since it is based on previous price data, it is a lagging indicator.


The two most commonly used moving averages are the simple moving average (SMA or MA) and the exponential moving average (EMA). SMA is expressed by obtaining price data over a period of time and averaging it. For example, the 10-day SMA is expressed by calculating the average price of the past 10 days. On the other hand, EMA aims to give more weight to the latest price data, which makes it more sensitive to recent price changes.


As mentioned earlier, the moving average is a tracking indicator. The longer the period, the greater the delay, making the 200-day SMA react more slowly to recent price changes than the 50-day SMA.


Traders often use price ratios with specific moving averages to measure current market trends. For example, if the price stays above the 200-day simple moving average (SMA) for a long period of time, many traders will treat it as an asset in a bull market.


Traders can also use moving averages as signals to buy or sell. For example, if the 100-day SMA crosses the 200-day SMA, this can be considered a sell signal. But what does this cross mean? The past 100 days are now less than the past 200 days. The idea behind selling here is that short-term price changes no longer follow an upward trend, so it can be reversed.

3. Moving Average Convergence Divergence (MACD)

MACD is used to determine the momentum of an asset by showing the relationship between two moving averages. It is made up of two lines: the MACD line and the signal line. The MACD line is calculated by subtracting the 26 EMA from the 12 EMA and then plotting it on the 9 EMA chart of the MACD line (signal line). Many charting tools usually also include a histogram that shows the distance between the MACD line and the signal line.

By looking for the difference between MACD and price movements, traders can understand the strength of the current trend. For example, if the price rises and the MACD falls, the market can reverse. In this case, what does MACD tell us? The price rises as the momentum weakens, so the possibility of a callback or reversal is high.


Traders can also use this indicator to find any overlap between the MACD line and its signal line. For example, if the MACD line crosses the signal line, it may indicate a buy signal. Conversely, if the MACD line crosses the lower signal line. This can indicate a sell signal.


MACD is usually used in combination with RSI as a measure of momentum, but it is used for different factors. Together, they aim to provide a more comprehensive perspective of the technology market.

4. Stochastic RSI (StochRSI)

The Stochastic RSI is a momentum oscillator that is used to determine whether an asset is overbought or oversold. As the name suggests, it is derived from RSI because it is generated based on RSI value rather than price data. Created using a formula called random. Oscillator formulas for common RSI values. Typical random RSI values ​​range from 0 to 1 (or 0 to 100).

Due to its higher speed and sensitivity, StochRSI can generate a variety of difficult to interpret trading signals. It is usually most useful when it is near the top or bottom.


StochRSI values ​​above 0.8 are usually considered overbought, while values ​​below 0.2 can be considered oversold. A value of 0 means that the RSI has reached the lowest value during the measurement period (usually the default value of 14). 1 indicates that the RSI has reached the highest value during the measurement period.


Similar to how RSI is used, overbought or oversold StochRSI does not mean that the price will inevitably reverse. In the case of StochRSI, it simply indicates that the RSI score (from which the StochRSI score is derived) is close to the extreme value of your most recent reading. It is also important to note that StochRSI is more sensitive than RSI and therefore tends to generate more false or misleading signals.

5. Bollinger Bands (BB)

Bollinger Bands measure market volatility and overbought and oversold conditions. They consist of three lines, namely SMA (middle band) and upper and lower bands. The settings may vary, but they usually fluctuate up and down. The bands represent two standard deviations from the mean. As the volatility increases and decreases, the spacing between the bands increases and decreases.

Generally speaking, the closer the price is to the high, the closer the asset on the chart is to overbought conditions. Conversely, the closer the price is to the lower limit, the closer it is to oversold conditions. It stays within the stripes, but in rare cases, it breaks above or below the stripes. Although this event itself is not a trading signal, it can indicate extreme market conditions.


Another important BB concept is the so-called squeeze, which refers to the low volatility stage where all the bands are very close, which can be used as an indicator of potential future volatility. There may be a period of lower volatility after each other.

Closing thoughts

Although the indicators show data, it is important to remember that the interpretation of these data is very subjective. Therefore, it is always helpful to step back and consider whether personal biases affect the decision-making process. One trader can only become another trader’s market frenzy.


Indicators, like most market analysis methods, work best when combined with one another or with other methods such as fundamental analysis (FA).


The best way to learn technical analysis (TA) is to practice a lot.