Content
Introduce
Relative Strength Index (RSI)
Moving average (MA)
Moving Average Convergence Divergence (MACD)
Stochastic RSI (StochRSI)
Bollinger Bands (BB)
summary
Introduce
Traders use technical indicators to gain additional insight into an asset's price action. These indicators make it easier to identify patterns and spot buy or sell signals in the current market environment. There are different types of indicators and they are widely used by day traders, swing traders and sometimes even long-term investors. Some professional analysts and professional traders even create their own indicators. In this article, we will take a quick look at some of the most popular technical analysis indicators, which can be useful in any trader's market analysis toolkit.
1. Relative Strength Index (RSI)
RSI 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 standard is the previous 14 periods – 14 days or 14 hours, etc.). This data is then displayed as an oscillator with values from 0 to 100.
Since RSI is a momentum indicator, it shows the rate (momentum or momentum) at which price is changing. This means that if momentum is increasing while price is rising then the uptrend is strong and more and more buyers are joining. Conversely, if momentum declines while prices rise, it suggests that sellers may soon take control of the market.
A common interpretation of the RSI is that when the index is above 70, the asset is understood to be overbought, and when below 30 the asset is understood to be oversold. Therefore, extreme values may indicate an impending trend reversal or stop. Even so, it is best for traders not to view this signal as a direct buy or sell signal. As with many other technical analysis (TA) indicators, the RSI can provide false or misleading signals. So, it is always useful to consider other factors before entering a trade.
Want to learn more about this indicator? Read more article Relative Strength Index (RSI) .
2. Moving Average (MA)
Moving averages smooth out price action by filtering out market noise and highlighting key trends. Because it is based on past 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). The SMA is drawn by taking price data from a specified period and creating an average value. For example, the 10-day SMA is plotted by calculating the average price over the past 10 days. On the other hand, the EMA is calculated in a way that places more weight on recent price data. This makes it more reactive to recent price action.
As mentioned, moving averages are considered lagging indicators. The longer the time, the greater the delay. Therefore, the 200-day SMA will react more slowly to recent price action than the 50-day SMA.
Traders often use price's relationship to specific moving averages to evaluate current market trends. For example, if the price stays above the 200-day SMA for an extended period of time, the asset may be considered by many traders to be in a bull market.
Traders can also use moving average crossovers as buy or sell signals. For example, if the 100-day SMA crosses below the 200-day SMA, it could be considered a sell signal. But what exactly does this sign mean? It shows that the average price over the past 100 days is currently lower than the average price over the 200 days. The idea behind selling here is that short-term price movements are no longer in an uptrend, so the trend could soon reverse.
Want to learn more about this indicator? Read the article Moving Average .
3. Moving Average Convergence Divergence (MACD)
MACD is used to determine an asset's momentum by showing the relationship between two moving averages. MACD 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. This is then plotted on the 9 EMA of the MACD – the signal line of the EMA. Many tools also often incorporate a histogram showing the distance between the MACD line and the signal line.
By looking for divergences between MACD and price action, traders can better understand the strength of the current trend. For example, if price is making higher highs, while MACD is making lower highs, the market may soon reverse. What does MACD tell us in this case? Price is increasing while momentum is decreasing, so a correction or reversal is more likely.
Traders can also use this indicator to look for a crossover between the MACD line and the signal line. For example, if the MACD line crosses above the signal line, that could indicate a buy signal. Conversely, if the MACD line crosses below the signal line, it may indicate a sell signal.
MACD is often used in conjunction with RSI, as they both measure momentum, but are calculated using different factors. Combining these two lines, we can give a more complete technical outlook on the market.
Want to learn more about this indicator? Read more in our article on MACD .
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4. Stochastic RSI (StochRSI)
Stochastic RSI is a momentum oscillator, used to determine whether an asset is overbought or oversold. As the name suggests, this indicator is a derivative of the RSI index. It is generated from RSI values, instead of price data. This indicator is created by applying a formula called the Stochastic (stochastic) oscillator formula to regular RSI values. Typically, Stochastic RSI values range from 0 to 1 (or 0 and 100).
Due to its higher speed and sensitivity, StochRSI can generate a lot of trading signals that are difficult to interpret. StochRSI is most useful when it is near the upper or lower extremes of its range.
A StochRSI indicator above 0.8 is generally considered overbought, while a value below 0.2 can be considered oversold. A value of 0 means that RSI is at its lowest value during the measured period (the default setting is usually 14). Conversely, a value of 1 represents that RSI is at its highest value during the measured period.
Similar to how RSI should be used, it is not certain that the price will reverse when the StochRSI value is at overbought or oversold levels. In the case of StochRSI, it simply indicates that the RSI values (from which the StochRSI values are derived) are near the extremes of recent readings. It's also important to note that the StochRSI is more sensitive than the RSI, so it tends to produce more false or misleading signals.
Want to learn more about this indicator? Read more articles about Stochastic RSI .
5. Bollinger Bands (BB)
Bollinger bands measure market volatility, as well as overbought and oversold conditions. They are made up of three lines - an SMA (middle band), an upper and lower band. The settings can vary, but typically the upper and lower bands are within two standard deviations of the band. As volatility increases and decreases, the distance between the bands also increases and decreases.
In general, the closer the price is to the upper band, the closer the charting asset is to overbought conditions. Conversely, the closer the price is to the lower range, the closer it may be to oversold conditions. For the most part, the price will stay within the bands, but in rare special cases it can go above or below them. While the event itself may not be a trading signal, it can act as a sign of harsh market conditions.
Another important concept of the BB band is called the squeeze period. It refers to a period of intense price volatility, causing all the bands to come very close to each other. This can be used as an indication of potential future volatility. Conversely, if the bands are very far apart, a period of reduced volatility may ensue.
Want to learn more about this indicator? Read the article Bollinger Bands.
summary
Although indicators display objective data, their interpretation is often very subjective, depending on the judgment of the individual trader. Therefore, it is helpful to stop and consider whether personal biases are influencing decision making. In short, what might be a direct buy or sell signal to one trader might just be a market noise signal to another.
As with most market analysis techniques, indicators are at their best when used in combination with each other or with other methods, such as with fundamental analysis (FA) .
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