Table of Content:
- Chapter 1: What is Cryptocurrency?
- Chapter 2: Cryptocurrency Trading Basics
- Chapter 3: Trading Strategies
- Chapter 4: Technical Analysis Basics
- Chapter5: Technical Analysis Indicators
- Chapter 6: How To Trade On Binance
Technical Analysis Indicators
What is a technical analysis indicator?
Technical indicators calculate metrics related to a financial instrument. This calculation can be based on price, volume, on-chain data, open interest, social metrics, or even another indicator.
As i have discussed earlier, technical analysts base their methods on the assumption that historical price patterns may dictate future price movements. As such, traders who use technical analysis may use an array of technical indicators to identify potential entry and exit points on a chart.
Technical indicators may be categorized by multiple methods. This can include whether they’re pointing towards future trends (leading indicators), confirming a pattern that’s already underway (lagging indicators), or clarify real-time events (coincident indicators).
Traders may use many different types of technical indicators, and their choice is largely based on their individual trading strategy. However, to be able to make that choice, they needed to learn about them first – and that’s what we’re going to do in this chapter.
Leading vs. lagging indicators
As I have discussed, different indicators will have distinct qualities and should be used for specific purposes. Leading indicators point towards future events. Lagging indicators are used to confirm something that has already happened. So, when should you use them?
Leading indicators are typically useful for short- and mid-term analysis. They are used when analysts anticipate a trend and are looking for statistical tools to back up their hypothesis. Especially when it comes to economics, leading indicators can be particularly useful to predict periods of recession.
When it comes to trading and technical analysis, leading indicators can also be used for their predictive qualities. However, no special indicator can predict the future, so these forecasts should always be taken with a grain of salt.
Lagging indicators are used to confirm events and trends that had already happened, or are already underway. This may seem redundant, but it can be very useful. Lagging indicators can bring certain aspects of the market to the spotlight that otherwise would remain hidden. As such, lagging indicators are typically applied to longer-term chart analysis.
Relative Strength Index (RSI) (VV IMP)
The Relative Strength Index (RSI) is an indicator that illustrates whether an asset is overbought or oversold. It is a momentum oscillator that shows the rate at which price changes happen. This oscillator varies between 0 and 100, and the data is usually displayed on a line chart.
When the RSI value is under 30, the asset may be considered oversold. In contrast, it may be considered overbought when it’s above 70.
The RSI is one of the easiest technical indicators to understand, which makes it one of the best for beginner traders.
How to Use the Relative Strength Index
Beginner Guide to the RSI Indicator
RSI Divergence (VV IMP)
RSI Divergence In Detail
RSI Divergence (In Urdu/Hindi)
Moving Averages (VV IMP)
Moving averages smooth out price action and make it easier to spot market trends. As they’re based on previous price data, they lack predictive qualities. As such, moving averages are considered lagging indicators.
Moving averages have various types – the two most common one is the simple moving average (SMA or MA) and the exponential moving average (EMA).
What’s the difference between them?
The simple moving average is calculated by taking price data from the previous n periods and producing an average. For example, the 10-day SMA takes the average price of the last 10 days and plots the results on a graph.
The exponential moving average is a bit trickier. It uses a different formula that puts a bigger emphasis on more recent price data. As a result, the EMA reacts more quickly to recent events in price action, while the SMA may take more time to catch up.
As I have mentioned, moving averages are lagging indicators. The longer the period they plot, the greater the lag. As such, a 200-day moving average will react slower to unfolding price action than a 100-day moving average.
Moving averages can help you easily identify market trends.
The Most Used Moving Averages are:
- 7 or 9 MA
- 25 MA
- 50 MA
- 100 MA
- 200 MA
How To Use The Standard Moving Averages, Beginners Guide
How To Trade Moving Averages (Part 1)
How To Trade Moving Averages (Part 2)
Moving Averages In Detail
Fibonacci Retracement (FIB) (VV IMP)
The Fibonacci Retracement (or Fib Retracement) tool is a popular indicator based on a string of numbers called the Fibonacci sequence. These numbers were identified in the 13th century, by an Italian mathematician called Leonardo Fibonacci.
The Fibonacci numbers are now part of many technical analysis indicators, and the Fib Retracement is among the most popular ones. It uses ratios derived from the Fibonacci numbers as percentages. These percentages are then plotted over a chart, and traders can use them to identify potential support and resistance levels.
These Fibonacci ratios are:
- 61.8% (Strong Level)
- 78.6% (Strong Level)
The main idea behind plotting percentage ratios on a chart is to find areas of interest. Typically, traders will pick two significant price points on a chart, and pin the 0 and 100 values of the Fib Retracement tool to those points. The range outlined between these points may highlight potential entry and exit points, and help determine stop-loss placement.
The Fibonacci Retracement tool is a versatile indicator that can be used in a wide range of trading strategies.
How to Draw Fibonacci Retracement
How To Use The Fibonacci Retracement Tool for Down Trend
Fibonacci Retracement In Urdu/Hindi
Fibonacci Retracement in More Detail (Urdu/Hindi)
Bollinger Bands (BB)
Named after John Bollinger, the Bollinger Bands measure market volatility, and are often used to spot overbought and oversold conditions. This indicator is made up of three lines, or “bands” – an SMA (the middle band), and an upper and lower band. These bands are then placed on a chart, along with the price action. The idea is that as volatility increases or decreases, the distance between these bands will change, expanding and contracting.
Moving Average Convergence Divergence (MACD)
The MACD is an oscillator that uses two moving averages to show the momentum of a market. As it tracks price action that has already occurred, it’s a lagging indicator.
The MACD is made up of two lines – the MACD line and the signal line. How do you calculate them? Well, you get the MACD line by subtracting the 26 EMA from the 12 EMA. Simple enough. Then, you plot this over the MACD line’s 9 EMA – the signal line.
A crossover between the two lines is usually a notable event when it comes to the MACD. If the MACD line crosses above the signal line, that may be interpreted as a bullish signal. In contrast, if the MACD line crosses below the signal, that may be interpreted as a bearish signal.
MACD in detail
The trading volume may be considered the quintessential indicator. It shows the number of individual units traded for an asset in a given time. It basically shows how much of that asset changed hands during the measured time.
Some consider the trading volume to be the most important technical indicator out there. “Volume precedes price” is a famous saying in the trading world. It suggests that large trading volume can be a leading indicator before a big price move (regardless of the direction).
By using volume in trading, traders can measure the strength of the underlying trend. If high volatility is accompanied by high trading volume, that may be considered a validation of the move. This makes sense because high trading activity should equal a significant volume since many traders and investors are active at that particular price level. However, if volatility isn’t accompanied by high volume, the underlying trend may be considered weak.
NOTE: There are thousands of Technical indicators out there, but you should only use 1 to 3 technical indicators on a chart to avoid getting confused. I personally use RSI, Moving Averages and FIB only.