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Trading is all about making good-enough predictions. You buy a crypto asset, believing that the price will go up in the future. You sell it, believing that the price will go down in the future. It’s as simple as that. But making directional predictions is not easy, as we’ve seen in 2022 with 3AC and FTX.
To make money trading, you need to have an edge over the market and information and analysis that other traders don’t have. Some of these are technical indicators, which measure historical prices and volume data to help you understand what is happening in the market right now. However, there are many other types of information and analysis that you can use to make your predictions.
So, as much as the world of finance loves to scoff at technical analysis, the fact is that it works. Let’s now look at six of the most important technical indicators every trader should know about.
Notice the Patterns
Patterns are, simply put, shapes on a chart that represent supply and demand levels in the market. These can be anything from double tops, triple bottoms, head, and shoulders, breakouts, or pivots. Moreover, Candlesticks patterns like dojis, engulfing patterns, and harami are popular among traders because they provide insight into potential market momentum or direction. On the other hand, other patterns, such as support and resistance levels indicate areas where the market is likely to stall or reverse.
So, these patterns represent buying and selling pressure in the market and by recognizing these patterns, you can accurately predict where the price is headed.
Moving averages are lagging indicators used to measure momentum in the market and smooth out any inconsistencies in the data. Trends are important in trading and understanding how strong or weak a trend is will help you make better decisions on when and where to enter, exit, or reverse your positions.
Moving Average Convergence/Divergence (MACD) is one of the most widely used and reliable indicators that measure momentum by looking at the difference between two moving averages of security. If you want to identify a strong trend in the market, you can look for when the MACD line crosses above or below the signal line. One of the notorious long-term bearish crossovers on MACD is the squishy.
Relative Strength Index (RSI)
The relative strength index, or RSI for short, is an oscillator used to measure the momentum of a security. It ranges from 0 to 100 and shows whether the asset is overbought or oversold. Generally speaking, when the RSI value is above 70, it indicates that the security may be overbought and when it is below 30 it may be oversold. However, you should use other indicators to confirm what the RSI is telling you.
For instance, if the RSI is close to 70 and the MACD is showing a strong uptrend, that could be a good time to buy. On the other hand, if the RSI is close to 30 and the MACD is indicating a downtrend, it may be time to sell.
Bollinger bands are used to measure volatility in the market and provide insight into possible future movements of security prices. They consist of three lines that move up and down with a security price. The middle line is usually a simple moving average and the two outer lines are based on standard deviations from it.
When the band’s contract, it indicates that there is low volatility in the market which could indicate a potential breakout in either direction. On the other hand, when the bands expand, it suggests that volatility is high and that the price could be headed for a pullback.
On Balance Volume (OBV)
OBV is an indicator used to measure volume on both sides of the market, which makes the buying and selling pressure. It takes into account the volume of security traded on days when its price increased or decreased from the day before, as well as the total amount of trading volume over a given time.
The OBV can be used to confirm trend reversals, as well as identify potential buying and selling opportunities. For instance, if the OBV shows an uptrend when other indicators are indicating a downtrend, it could be a sign that the price could soon reverse direction.
You can also use it to confirm breakouts or support and resistance levels. If the buying pressure is increasing, it suggests that the current price trend could continue in the same direction.
The stochastic oscillator is an indicator used to measure momentum in the market. It shows if a security’s closing price has been higher or lower than the price range over a given time
It is typically used to identify potential buying and selling opportunities, as well as confirm breakouts and trend reversals.
For instance, if the stochastic indicator shows that the security is overbought when other indicators are indicating a downtrend, it could be an opportunity to sell. On the other hand, if the stochastic indicator shows that the security is oversold when other indicators are indicating an uptrend, it could be a good time to buy.
No one indicator is perfect and you should not rely on any one indicator to make all your trading decisions. However, using a combination of these six can give you a better understanding of what is happening in the market and help you make more informed decisions.
Make sure to practice using these indicators in a demo trading environment before implementing them in your real-time trading strategy. Doing so will help you get a better sense of how to use these indicators most effectively.