Last week, we saw together how patterns can help you find trading opportunities. This time we’re going to talk about another source of opportunity: technical indicators. The objective, through this Tribune, will be to make you discover what a technical indicator is concretely. Once we agree on the terminology, we will discover together no less than eight indicators! Come on, sit back comfortably, with a little mint syrup (it’s too good for a hot drink), and you’re good to go!
What is a technical indicator?
The technical indicators are tools for traders. These are constructed from “raw” data from a graph. By raw data I mean:
- Volatility price
- Order book
These elements are directly readable and do not require transformations to obtain them.
A technical indicator will be created by mathematical formulas from the above variables.
For example, we could create a Cryptocurrencies indicator which would be:
Multiply the price by 5, then subtract from it the volume of the current day and then add 28.
The famous Cryptocurrencies indicator
And we can even configure it on sites like TradingView ! Let’s look at this famous Cryptocurrencies indicator…
Well, I did not tell you that this indicator would be a marvel for trading eh! But suddenly, you will understand, technical indicators, there can be infinitely many.
And the common point between all these indicators is that they are the result of a calculation between several variables.
It’s funny, but in the end, what are these indicators for? ? Can we not just look at the raw data (as a reminder, the price, the volumes, the volatility and the order book) and then make our own opinion?
Yes, of course it is. Besides, some traders do not use any technical indicator.
However, these allow graph of complex information. For example, even if you see the daily price through the candles on your chart, did you notice that the price is going above its average in recent days?
Well, with an indicator that we will see later in this article, it’s easy as pie!
The objective behind these indicators is to facilitate the vision overview of a situation for traders. And of them to accompany in their decision-making.
Moreover, by dint of research, traders have discovered better indicators than others. They fall into two large families:
- The oscillators
- The trend tracking indicators
And that’s good, because we will discover them together!
The oscillators are the first big family oftechnical indicators. They are so called because they oscillate (wow revelation of the year, thank you Cryptodidacte!) Between bounded values.
For example, the price is not an oscillator. Indeed, it can vary between 0 (even negative in some cases) and potentially infinity. It has no limits.
On the other hand, a technical indicator of oscillator type will always be seen thick headed, even if the price behind goes to infinity.
Here, this is not a trading indicator, but a function that you must have encountered during your studies: the cosine function.
The latter is bounded between -1 and 1. And whatever happens, it will always be between these two values!
Well, it will be the same for the indicators that we will discover now!
The RSI is probably one of the best known indicators.
He represents himself by a value that ranges from 0 to 100. And within these values, certain zones are specific:
- Between 0 and 30, we are in “over-sale“
- Between 30 and 70, everything is fine
- 50 is considered the neutral zone and its upward or downward crossing is often monitored
- Between 70 and 100, we are in “over-purchase“
The interest of the RSI is to perceive a slowdown in the trend, or a reversal to come in the latter.
Besides, if this indicator interests you, I highly recommend reading the article by Maxime Prigent which is … well read it, you will understand for yourself.
The MACD, or Moving Average Convergence Divergence, is a technical indicator for finding opportunities and measuring the importance of a momentum or force of movement.
As with the RSI, this indicator has several parts:
- a blue line that represents the MACD line which is the difference between two moving averages
- a red line also called signal line which is a moving average different from the previous two
The objective here will be to identify the crosses between the MACD line and the signal line.
Indeed, a crossing from the top of the signal line can be a sign that buyers dominate the market.
On the contrary, a cross at the bottom may indicate that sellers regain control.
Finally, the further the lines are from the zero line, the more force of movement is important.
Trend tracking indicators
We will now leave the world of technical oscillator type indicators to discover trend tracking indicators.
Unlike oscillators, the latter are not bounded on their value. Generally, the higher the price, the higher the indicator will take, and vice versa.
These indicators are mostly represented directly on the graph, superimposed on prices.
The moving averages are probably the best known trend indicator. Difficult to see technical analyzes on the internet without seeing at least a moving average on the graph!
On the Bitcoin graph above, I have represented two moving averages:
MY what ?! Cryptodidact, you speak Chinese!
Moving averages are more commonly called MY for Moving Average. And these represent the average price over X days.
For example, MA 9 is the average price over the last 9 days. The MA 200, over 200 days, you will understand!
The interest behind these averages resides in thepsychological aspect that they represent.
Indeed, as all traders monitor these moving averages, they end up representing important points of interest.
If you look again at the graph above, you will be able to observe easily in particular that the MA 200 served as resistance to Bitcoin between March and November 2019.
These averages can therefore be used as important psychological thresholds. Moreover, the further away an average (ie with a large number of days taken into account), the stronger the strength of its signals.
The Ichimoku cloud is one of the most imposing technical indicators. Indeed, it takes up a lot of space on a graph.
This indicator takes its name from the… cloud that forms on the graph (yes, analysts’ imagination is limitless!).
Generally, this indicator can detect support and resistance zones for the price.
For example, when approaching the cloud, prices will tend to experience difficulties in continuing to rise.
If you want to go further on the use of this indicator, Binance Academy has made a detailed article on this!
Other important technical indicators
The Fibonacci levels (also called levels of Fibo for the intimate ones) are important psychological thresholds.
They follow very precise coefficients (0.236, 0.5, 0.618 for example) and indicate zones which could serve as resistors and / or supports.
On the graph above I have plotted Fibonacci on the price of Bitcoin in 4H timeframe.
You can see that the levels have been respected with many bounces on the 0.618 and 0.786 areas in particular.
The volume… an indicator ? Didn’t you tell us it was raw data at the start of the article?
So yes, indeed. But I had to talk about it. Indeed, the volumes are too often ignored and yet … They regularly give far more important signals as technical indicators.
These will notably come validate or overturn a signal given by a technical indicator, or a chartist figure.
For example, in previous chapters, we have seen that crossing resistance from above can be a bullish signal, and therefore a buy signal.
However, if you observe stagnant or even declining volumes at this time, you should beware.
Indeed, these can be a sign that the market does not believe in this bullish signalr, and that the breakout (crossing resistance) is not confirmed with a likely return under this coming resistance.
Similarly, if ever a signal is accompanied by sharply rising volumes, then There is action ! Your signal has an increased probability of being exact.
This eighth Trading Tribune ends here! I hope you have always liked it. Technical indicators are one weapon among many in order to complete your trading. It is important to understand one thing: it is useless to want to use all these indicators at the same time.
The goal for a trader is to find a few indicators that suit him, and to manipulate them on a daily basis.
This article makes no claim to cover all patterns existing in trading! Besides, with a little experience you will end up selecting for yourself the patterns that seem relevant or not. Like many notions in trading, the patterns used in your system will be personal and chosen according to your affinities!
For the ninth chapter, we will discuss Stop Loss and Take-Profits. These elements are essential for any trader wishing to control his risk and his gains in trading. And there are things to say!
In any case, I hope you enjoy reading all of this, and that you will follow this Tribune carefully to the end!
See you next week !
Previous chapters of the Trading Grandstand:
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