Professional traders use various technical indicators to obtain additional information about the situation on the valuable assets market. Most often, to facilitate the identification of patterns and trends, as well as to predict the best periods for spot buying and selling. And there are a lot of such indicators - even some long-term investors use them. In addition, some experts develop their own indicators, most often - displaying the relationship between some existing standard ones. However, in this article, we will tell you about the most common technical indicators that are present in almost any tool for market analysis.
RSI - Relative Strength Index
By measuring the latest changes in the price of an asset for any given period, this index shows the dynamics of price changes. In the settings, you can usually set the value of the measurement period, but the default is 14 previous periods - hours, days, weeks, etc. And all this is displayed in the form of a graph resembling an oscillator curve - with fluctuations from 0 to 100 and the ability to visually see the direction of movement.
RSI shows not only the direction of price changes, but also its speed. If both speed and price are growing at the same time, this means that more and more buyers are entering. And if, for example, the price rises, and the momentum begins to decline, then this can be a signal for cessation of the trend and taking control of the market.
There is also a so-called “traditional RSI interpretation”. Simply put, if a position on the chart exceeds 70, then it is overbought, and if it is below 30, then it is oversold. Usually, such extreme values indicate a fast trend reversal or a rollback of the situation. However, you should not focus only on the relative strength index when buying and selling - it can give false signals and not react too quickly to a real change in the picture of what is happening.
MA - Moving Average
By filtering "market noise" and highlighting the direction of the trend, it helps to track the dynamics of the market. Simply put, it cuts off random changes and high-frequency fluctuations, allowing you to predict long-term trends and changes. The indicator is lagging because it is based on data from the past tense.
There are different options for the moving average. Most often, they use a simple moving average (SMA or just MA), as well as an exponential moving average (EMA). The first is constructed by taking price data for a certain period and obtaining an average value. So, for example, an SMA over 10 days gives an idea of the average price over the last 10 days. From several such moving averages, you can build a graph of price changes. As for the exponential moving average, more recent data is becoming more important in it, which makes it more sensitive to recent fluctuations in the price range.
Since the indicator is lagging or delaying, the longer the period is taken into account when calculating MA, the worse the chart reacts to recent fluctuations and changes. Simply put, EMAs in 200 days respond more slowly than SMAs in 50 days.
Traders use the ratio of the current price to the moving average to evaluate the current trend. If, for example, the value of an asset is above the 200-day SMA, then the trend for this asset is bullish.
In addition, a moving average may indicate the beginning of a trend reversal. Here you need to monitor the intersections of various MAs. If, for example, an SMA crosses the SMA line in 100 days in 200 days, then this means that the average price has recently started to fall. And it may continue to fall further, therefore it is better to sell the asset, because short-term changes no longer follow a long-term uptrend.
MACD - Moving Average Convergence/Divergence
Allows you to determine the speed and direction of movement of asset prices, based on the ratio of moving averages. It consists of two parts - the MACD line and the signal line. The first is calculated by subtracting the EMA for 26 days from the EMA for 12 days. The signal is the line corresponding to the EMA for 9 days. The MACD chart very often additionally displays a histogram showing the difference between the two lines.
The presence of discrepancies between the MACD lines allows traders to get an idea of the strength of the current trend. If, for example, the maximum price is high and the maximum of MACD lines is lower, then this will most likely indicate a reversal of the market. That means if the momentum decreases, and the price is still rising, then soon the growth will be replaced by a pullback.
The analysis of the intersection points of the MACD lines is also used. If, for example, the MACD line crosses the signal line and goes higher, then this gives a buy signal. And if it goes below - then, accordingly, for sale.
The MACD chart is often used in conjunction with RSI, since both of them show the speed of price changes, only due to the analysis of various factors. However, if the forecasts for them match, then the prediction of further dynamics with a high probability will come true.
StochRSI - Stochastic RSI
Used to determine if an asset is overbought or oversold. However, it is generated based on RSI, and not based on specific prices. For the calculation, the formula of the stochastic oscillator is used, into which the usual RSI values are substituted. So the obtained values range from 0 to 1 (or from 0 to 100).
StochRSI is faster and more sensitive than RSI, so it generates a lot of signals, which can be quite difficult to interpret. So traders usually try to focus not on average values, but on finding points near the upper and lower extremes.
To simplify, StochRSI values more than 0.8 means that the asset is overbought, and below 0.2 - it is oversold. 0 means that RSI is at the lowest position for the period under review, and 1, accordingly, is vice versa.
However, overbought or oversold does not mean an immediate reversal of prices. In addition, don't forget about the greater sensitivity of StochRSI, because of which more false signals that can confuse are generated.
BB - Bollinger Bands
They are used to measure market volatility, and also display oversold and overbought conditions. They consist of three components - sMA (simple moving average) and two other lines. Usually, these lines are located at a distance of the standard deviation from the middle band. If volatility increases, then the distance between the lines increases. If it falls, it decreases.
Usually, this graph is superimposed on the graph of changing the price of an asset. If it is within the lines, then the situation is considered normal. If closer to the upper line, then the overbought situation is getting closer. And to the bottom - oversold. The term “trading corridor” is also used. Going beyond this corridor is not necessarily a trading signal, but always a sign of extreme market conditions.
When the market volatility is low, a compression situation is observed. The stripes are very close to each other. This may indicate a further increase in volatility. If the bands are far from each other, then this may indicate a further decrease. The width of this band is proportional to the standard deviation from MA for the research period (usually 14 standard periods).
Yes, indicators allow you to determine the dynamics of prices in the market. However, their interpretation is a subjective question. What may be market noise for one person is a signal for another to buy or sell. In addition, a simple technical analysis shows much better results if combined with other methods, for example, fundamental analysis.
Finance and investmentAuthor: EXBASE.IO | Nov 09, 2020
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