Key Points
Technical Analysis (TA) indicators help traders understand asset price movements, making it easier to identify patterns and possible trading signals.
Among the many Technical Analysis indicators available, some of the most well-known options include RSI, Moving Averages, MACD, StochRSI, and Bollinger Bands.
Although Technical Analysis indicators can be very useful, the interpretation of their data can be subjective. To reduce risks, many traders use Technical Analysis indicators combined with Fundamental Analysis and other methods.
Introduction
Graphical indicators are the preferred options of experienced technical analysts. Everyone chooses the tools that best suit their unique trading style to learn to master the trade. Some like to watch market momentum, while others prefer to filter out the noise or measure volatility.
But what are the best technical indicators? Well, each trader has their preference. However, there are some very popular indicators, such as those listed below (RSI, Moving Average, MACD, StochRSI and Bollinger Bands). Are you interested in knowing what they are and how to use them? Continue reading.
Why Technical Analysis indicators?
Traders use technical indicators to gain additional information about an asset's price action. These indicators make it easier to identify patterns and detect potential buy or sell signals in the current market environment.
There are many types of indicators and they are widely used by day traders, swing traders and sometimes even long-term investors. There are also professional analysts and experienced traders who create their own custom indicators.
In this article, we will provide a brief description of some of the most well-known Technical Analysis (TA) indicators that can be useful as market analysis tools for any trader.
1. Relative Strength Index (RSI)
It is a momentum indicator that shows whether an asset is overbought or oversold. It does this by measuring the magnitude of recent price changes. The default setting is the previous 14 periods (14 days for daily charts, 14 hours for hourly charts, etc.). The data is displayed as an oscillator of values between 0 and 100.
As RSI is a momentum indicator, it shows the speed (momentum) at which the price is changing. This means that if the momentum is increasing while the price is rising, we will have a strong uptrend and more and more buyers will emerge. On the other hand, if momentum is decreasing while price is rising, it could indicate that sellers may soon take control of the market.
A traditional interpretation of the RSI is when its level is above 70, the asset is likely overbought and when it is below 30, the asset is likely oversold. Therefore, extreme values may indicate an imminent trend reversal or a pullback (correction movement). Still, it may be best not to think of these values as direct buy or sell signals. As with many other Technical Analysis techniques, the RSI can provide false or misleading signals, so it is always useful to consider other factors before entering a trade.
Want to know more? Check out our article on the Relative Strength Index (RSI).
2. Moving Average (MM or MA - Moving Average)
The purpose of using a Moving Average on financial charts is to smooth price action and highlight the direction of the market trend. Moving Averages are considered Lagging Indicators, as they are based on past price data.
The most used are the Simple Moving Average (MMS or MM) and the Exponential Moving Average (EMA). The Simple Moving Average is plotted using price data from a defined period and producing an average. For example, the 10-day Simple Moving Average is plotted by calculating the average price over the last 10 days. The Exponential Moving Average, on the other hand, is calculated in such a way that the most recent price data carries more weight. Therefore, it is more reactive to recent price action.
As mentioned, the Moving Average is a Lagging Indicator. The longer the period, the longer the delay. Therefore, a 200-day Simple Moving Average will react more slowly to recent price action compared to a 50-day Simple Moving Average.
To assess the current market trend, traders often use the relationship between price and specific Moving Averages. For example, if an asset's price remains above the 200-day Simple Moving Average for an extended period of time, many traders may consider the asset to be in an uptrend (bull market).
Traders also use Moving Average crossovers as buy or sell signals. For example, if the 100-day Simple Moving Average crosses below the 200-day Simple Moving Average, this could be considered a sell signal. But what does this intersection mean? It indicates that the average price over the last 100 days is now below the average price over the last 200 days. Here, the idea behind selling is that short-term price movements are no longer following the uptrend, so the trend is more likely to reverse soon.
Want to know more? Check out our article on Moving Averages.
3. Moving Average Convergence and Divergence (MACD)
The 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-day EMA Exponential Moving Average from the 12-day EMA. Then, the chart is plotted over the 9-day EMA of the MACD line – the signal line. Many charting tools also often incorporate a histogram, which shows the distance between the MACD line and the signal line.
By looking for divergences between the MACD and price action, traders can gain insight into the strength of the current trend. For example, if the price is rising more strongly while the MACD is rising less strongly, the market may be reversing soon. In that case, what is the MACD telling us? The price is increasing while the momentum is decreasing, therefore there is a higher probability of a correction or reversal occurring.
Traders can also use this indicator to look for crossovers between the MACD line and its signal line. For example, if the MACD line crosses above the signal line, it may suggest a buy signal. On the other hand, if the MACD line crosses below the signal line, it could be a sell signal.
MACD is often used in combination with RSI as they both measure momentum but by different factors. The premise is that together, they can give a more complete technical view of the market.
Want to know more? Check out our article on MACD.
4. Stochastic RSI (StochRSI)
Stochastic RSI is a tool that analyzes momentum swings used to determine whether an asset is overbought or oversold. As the name suggests, it is a derivative of RSI as it is generated from RSI values rather than using price data. It is created by applying the stochastic oscillator formula to common RSI values. Typically, Stochastic RSI values range between 0 and 1 (or 0 and 100).
Due to its greater speed and sensitivity, StochRSI can generate many difficult-to-interpret trading signals. It is generally most useful when used near the upper or lower end of the range.
A StochRSI reading value above 0.8 is generally considered overbought, while a value below 0.2 can be considered oversold. A value of 0 means that the RSI is at its lowest value in the measured period (the default period is usually 14). On the other hand, a value of 1 represents that the RSI is at its highest value in the measured period.
In the same way that the RSI should be used, an overbought or oversold StochRSI value does not mean that the price will reverse for sure. In the case of StochRSI, it simply indicates that the RSI values (from which StochRSI values are derived) are close to the extremes of their recent readings. It is also important to keep in mind that the StochRSI is more sensitive than the RSI indicator, so it tends to generate false or misleading signals more often.
Want to know more? Check out our article on Stochastic RSI.
5. Bandas de Bollinger (BB - Bollinger Bands)
Bollinger Bands measure market volatility as well as overbought and oversold conditions. They are made up of three lines - a Simple Moving Average (the middle band), an upper band and a lower band. Settings can vary, but typically the upper and lower bands are two standard deviations away from the middle band. As volatility increases and decreases, the distance between the bands also increases and decreases.
Generally, the closer the price is to the upper band, the closer the respective asset is to overbought conditions. Conversely, the closer the price is to the lower band, the closer it is to oversold conditions. Most of the time, the price will stay within the bands, but on rare occasions, it may go above or below the values above them. While this event is not necessarily a trading signal, it can act as an indication of extreme market conditions.
Another important concept of Bollinger Bands is called squeeze. It refers to a period of low volatility in which all bands come very close together. It can be interpreted as an indication of potential future volatility. On the other hand, if the bands are very far from each other, a period of less volatility may occur.
Want to know more? Check out our article on Bollinger Bands.
Final considerations
While indicators help by providing data, it is important to remember that interpretation of this data is very subjective. As such, it's always helpful to step back and consider whether personal biases are affecting your decision-making. What may be a direct buy or sell signal for one trader may be just market noise for another.
As with most market analysis techniques, indicators are best when used in combination with each other or with other methods such as Fundamental Analysis (FA). The best way to learn Technical Analysis is through lots of practice.
Further reading
What is Technical Analysis (TA)?
Guide on Fundamental Analysis for Cryptocurrencies
The psychology of market cycles
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