Common Indicators in Technical Analysis

2022-03-11, 09:29

[TL; DR]

Technical Analysis is a technique of utilizing past price movements and trading indicators to predict the possible value of a digital asset.

Technical analysis is often confused for fundamental analysis, but the former deals with historical patterns while the latter deals with the asset's actual value.

To properly carry out technical analysis, you need to understand technical indicators.

Technical analysis indicators are divided into four main types; trend indicators, oscillator indicators, volatility indicators, and support/resistance indicators.

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You can find the trade market polarizing, lucrative, or a bit of both. It all just depends on the trading techniques you implement.

In the finance world, it is called “technical analysis.” Let's take a deeper look at it.

What is Technical Analysis?

Technical analysis is a method of utilizing past price patterns and trading indicators to determine the probable value of a digital asset.

Generally, the previous price movement of an asset, the statistics involved, coupled with its trading activity, is often a valid method for deciding if it is worth investing in or not. Therefore, traders, analysts, and investors infer that the past or current price of an asset will possibly define its future price.

Technical analysis is often misconstrued as fundamental analysis. Although both are similar as they involve analyzing an asset, they are different. Fundamental analysis focuses on an asset’s exact value while the technical analysis evaluates an asset’s historical price.

Technical analysis endeavors to predict the price movement, overall value, and trading activity of any asset influenced by demand and supply.

To that end, there have been many indicators formulated by trading experts to assist in technical analysis.

What Are Technical Indicators?

Technical indicators are analysis methods that enable you to sufficiently grasp and act on the price movements of an asset.

There are four primary technical indicators: trend, oscillator, volatility, and support or resistance. They are categorized based on the roles they play.

Here is a list of the common indicators in technical analysis:

Trend Indicators
As the name suggests, trend indicators were implemented to confirm the validity of a trend. Also, it enables traders to trade currency pairs that are trending upwards or downwards.

The following are types of trend indicators:

• Moving Average Indicator: A technical tool that indicates the direction (up, down, or sideways) in which a trading pair moves
Ichimoku Indicator: This indicator reveals current trends and when they have probably overturned.
• ADX Indicator: The Average Direction Index (ADX) notifies you if the price is trending or is in ranging.

Oscillator Indicators
They let you know how momentum is shaping up on a particular currency pair. When the price increases, the oscillator goes higher, and when the price drops lower, oscillators move correspondingly.

An oscillator can reach ‘overbought’ or ‘oversold’ level without it being a ‘top’ or ‘bottom.’ They are prone to staying at extreme levels for extended intervals, so it's advisable to wait for a clear signal before trading.

These are the types of oscillator indicators：
• RSI Indicator: It measures from 0-100, calculating the extent of recent price modifications to assess overbought or oversold conditions in the price of an asset. When a value is above 70, an asset is seen as overbought, while at below 30, it is seen as oversold.
• Stochastic Indicator: It compares a specific closing price of an asset to a range of its prices over a particular duration. It also produces overbought and oversold trading signals.
• CCI Indicator: The Commodity Channel Index (CCI) Indicator has no boundary for how high or low it can go. With it, overbought and oversold levels start at +100 and -100 respectively.
• MACD Indicator: The Moving Average Convergence Divergence demonstrates the relationship between two moving averages of an asset’s price. The MACD is computed by deducting the 26-period EMA (exponential moving average) from the 12-period EMA. The result is then drawn on a MACD line with a 9 EMA drawn directly on top (the Signal line). You can then buy when the MACD line surpasses the signal line and sell when the MACD line goes below the signal line.

Volatility Indicators
They measure the level of upswings and downswings for a specific currency pair. When the price fluctuates wildly up and down, it can be inferred to have high volatility, while a currency pair that does not fluctuate is said to have low volatility. Knowing the volatility level of a currency pair is essential as it will inform your decision on choosing a trade size, stop and limit level.

These are the types of volatility indicators:
• Bollinger Bands Indicator: It is widely used by professionals and beginners. It can be used to infer the entry and exit points for trade. Also, it can identify the overbought and oversold requirements. When the asset price breaks lesser than the lower band of the Bollinger Bands, prices have plummeted too much and are due to leap. Contrasting my, when price breaks higher than the upper band, the market is termed overbought.
• ATR Indicator: The Average True Range (ATR) indicator reveals how much an asset moves, on average, during an allotted period.

Support/Resistance Indicators
They indicate price levels on charts that manage to function as impediments, deterring the price of an asset from getting pushed in a specific direction. Sometimes the odds support a pause or reversal of a widespread trend. Support and resistance indicators are the best at spotting them.

Support occurs where a downtrend is anticipated to pause due to a high level of demand.

Resistance occurs where an uptrend is anticipated to pause temporarily due to a high level of supply.

These are the types of support/resistance indicators:
• Pivot Points: It measures the market's overall trend over various time intervals. Trading above the pivot point initiates a bullish sentiment, while below it initiates a bearish one.
• Donchian Channels: They are upper and lower lines above and below current price action that show the high and low prices over an extended period. The area between both bands is called the “Donchian channel.”

While these are the four main types coupled with their subtypes, other indicators remain. Such as Standard deviation, Fibonacci retracement, Williams Percent Range, Aroon indicator, etc.

Conclusion

Every technical indicator listed plays a specific role in technical analysis, but you should be mindful of choosing the right one that works for you.

Author: Gate.io Researcher:Valentine A.
This article represents only the researcher's views and does not constitute any investment suggestions.
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