Trading indicators are used by traders to help determine where the price of an asset is heading to.
The market can be quite confusing at times putting retail traders to be their own worst enemies.
However, we will be helping new crypto traders to learn different types of indicators and how they can be used in this article.
What are Indicators?
Whether you’re interested in forex trading, crypto trading, or stocks trading, it can be helpful to use technical analysis as part of your strategy – and this includes studying various trading indicators.
Trading indicators are mathematical computations plotted as lines on a price chart that aid traders in identifying certain signs and trends in the crypto market. They are simply a set of tools applied to a trading chart to demystify the market and make a clearer analysis.
How were Trading Indicators Discovered?
Technical analysis as we know it today was first introduced by Charles Dow and the Dow Theory in the late 1800s. 1 Several noteworthy researchers including William P. Hamilton, Robert Rhea, Edson Gould, and John Magee further contributed to Dow Theory concepts helping to form its basis.
There are different types of trading indicators, including leading indicators and lagging indicators. A leading indicator is a forecast signal that predicts future price movements, while a lagging indicator looks at past trends and indicates momentum. Using trading indicators is part of any technical trader’s strategy. Paired with the right risk management tools, it could help you gain more insight into price trends.
Let’s explore 7 of the best trading indicators
- Moving average(MA)
- Exponential moving average (EMA)
- Bollinger bands
- Parabolic SAR
- MAC D
- Relative strength index(RSI)
- Average Directional Index (ADX)
Moving Average (MA)
A simple moving averages trading strategy is used by traders to chart the price movement of a security and ignore the day-to-day price fluctuations. Traders can compare short, medium, and long-term trends over large periods.
A 200-bar simple moving average is usually used as a substitute for the long-term trend. The 200-day moving average is considered especially significant in stock trading. As long as the 50-day moving average of a crypto price remains above the 200-day moving average, the crypto is generally thought to be in a bullish trend.
Exponential Moving Average(EMA)
The exponential moving average (EMA) is a weighted moving average that measures a trend, both bullish and bearish, of an asset over a given period.
The EMA is used in trading to determine whether the price of a security is going up or down, and can help to forecast future price direction.
A common trading strategy utilizing EMAs is to trade based on the position of a shorter-term EMA with a longer-term EMA. For example, traders are bullish when the 20 EMA crosses above the 50 EMA or remains above the 50 EMA, and only turn bearish if the 20 EMA falls below the 50 EMA.
Bollinger Bands
Bollinger Bands are a type of statistical chart characterizing the prices and volatility over time of an asset, using a formulaic method propounded by John Bollinger in the 1980s. Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price.
Because the distance of the bands is based on standard deviation, they adjust to volatility swings in the underlying price. Bollinger Bands use 2 parameters, Period and Standard Deviations, StdDev. Bollinger Bands are among the most reliable and potent trading indicators traders can choose from.
They can be used to read the trend strength, to time entries during range markets, and to find potential market tops.
Parabolic SAR
Parabolic SAR is a technical indicator to determine short-term momentum, helping determine where stop orders should be placed. Trailing stop-loss orders are placed at the SAR value, where a move beyond that level will signal a reversal. The parabolic SAR is used to gauge an asset direction and for placing stop-loss orders. The indicator tends to produce good results in a trending environment, but it produces many false signals and losing trades when the price starts moving sideways.
Mac D
Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. Traders use the MACD to identify when bullish or bearish momentum is high to identify entry and exit points for trades.
The MACD has many strengths and can help traders spot trend reversals, it is not infallible and struggles, particularly in sideways markets. Since the MACD is based on underlying price points, overbought and oversold signals are not as effective as a pure volume-based oscillator.
Relative Strength Index (RSI)
Relative strength index trading indicator is used in trending markets which would be to wait for the indicator to signal an overbought condition during an uptrend. The trader then waits for RSI to drop below 50, which signals a long entry. If the trend remains in place price will typically recover off this level and move to new highs. It is not uncommon for the price to continue to extend well beyond the point where the RSI first indicates the market as being overbought or oversold. For this reason, a trading strategy using the RSI works best when supplemented with other technical indicators to avoid entering a trade too early.
Average Directional Index (ADX)
The Average Directional Index, or ADX for short, is another example of an oscillator. ADX fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend. When the ADX is low, it highlights periods when the price is usually going sideways or trading in a range. The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate trade signals. For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy.
Conclusion
Trading cryptocurrency futures can be very risky,
To become profitable in trading, you’ll need to master the skills of Technical analysis, even without the use of technical analysis, Indicators help traders predict the price’s next possible movement, to capitalize on the indicator signal to take their position.