Introduction
Everyone hears news about others trading cryptocurrencies and sharing trading data on social media platforms. However, the thought of making investment decisions on one’s own is enough to raise a few hairs on the skin. Every smart person understands that it is not a good idea to risk or bet away their savings if they are not aware of how the market works.
Technical Indicators are the tools that can assist anyone in speaking the language of investing trends and becoming a cryptocurrency whisperer.
What are Technical Indicators?
Technical Indicators are a helpful technique for quantifying the behavior of a cryptocurrency based on its historical and current price movements. Since the dawn of civilization, mankind has fantasized about peeking into the future and becoming masters of their destiny.
However, despite all the accumulative knowledge of humanity, we are still unable to prophesize any future event with 100% accuracy. When it comes to trading, this task is nothing short of an attempt to venture into the future using mathematical equations and recognizing patterns.
Professional investors are fortune tellers who work with scientific tools like technical indicators to work out the future movements of cryptocurrencies.
How do Technical Indicators Work?
There are two ways to make profits from the cryptocurrency market. The first way is to bet all your savings into a popular cryptocurrency and hope for the best. The other one is to learn technical and fundamental analysis of the market and use indicators and ratios to measure the movement of these cryptocurrencies.
Some people can argue that despite any method, it all comes down to luck in the end. They might base their assumption on the fact that even top cryptocurrency investors cannot predict market movements with 100% accuracy.
This might seem philosophically correct interjections until we weigh the theory on facts and statistical data. No matter what job a person has, there is always a percentage of risk associated with it.
However, there is a huge difference between holding a steady job and depending on lottery tickets to make a living. The same rule applies to cryptocurrency investors who use quantifying rules to make trading decisions and those who depend on their luck to make a fortune.
Cryptocurrency investors who use technical analysis may effectively reduce their risks of losses in the trading field almost as near as the person who holds a steady paying job. Therefore, learning about technical indicators is very important for cryptocurrency investors.
Types of Technical Indicators
Broadly speaking, the types of technical indicators are a tricky business. Depending on different factors, the classification of technical indicators can change.
However, for this article, we are going to present the view that will allow novice investors to learn as many technical indicators as possible. Heuristically speaking, there are two most basic categories of technical indicators as under:
Leading Indicators
Leading indicators are the technical indices that allow investors to work out where the current price trend is heading. Rather than predicting price movement for an asset class, leading indicators point out when a new price trend is starting.
Lagging Indicators
Lagging Indicators enable the investors to make sense of the historical context and forces that lead the cryptocurrency to its current price point. The main objective of lagging indicators is when the investors can estimate a trend reversal. These signals actively follow the price trends for an asset.
With both aforementioned categories, cryptocurrency investors can make sense of the five basic types of technical indicators. All technical indicators can be fit into leading or lagging categories depending on their usage. The five most basic technical indicators are given as under:
Trend Indicators
Trend indicators are used to measure the direction and strength of ongoing trends and the direction of price movement. Trend indicators take advantage of Moving averages to establish a reference price point or baseline price. If the price of the cryptocurrency moves above the baseline price, it means that the asset is bullish.
On the other hand, if the price of cryptocurrency drops below the reference line, it means that it is bearish. Here are some most important sub-divisions of Trend Indicators:
Moving Averages
As indicated by the name, moving averages are used to generate the mean distance covered by a price movement in a given trading period. Moving averages are used to identify trends and trend reversals. They are also used for support and resistance level markings. Here are some of the most common moving average indicators:
Simple Moving Average (SMA)
Simple Moving Average (SMA) is also known as arithmetic moving average, and it is considered one of the most used MV among traders. SMA is useful for the identification of trend direction, but it is also useful for creating merging trading signals. The formula for the calculation of SMA is:
SMA= Aggregate of Data points in moving average period/ Total number of periods.
Weighted Moving Average (WMA)
Weighted Moving Average (WMA) is also known as a linearly weighted moving average or LWMA. In this type of MA, each data point possesses an assigned weight before working out the mean. The way to calculate the WMA is to take the example of a trading period that has 10 data points.
In this case, we will find the 10x product of the tenth data point, the 9x product of the ninth data point, and so on. The sum of all the data points will be used as the nominator, while the total number of periods will be used as the denominator to find the WMA result.
It allows the investors to put more emphasis on the latest price changes that enable them to read its output as a regressive trend.
Exponential Moving Average (EMA)
Exponential Moving Average (EMA) is also known as EWMA or Exponential Weighted Moving Average. Rather than giving importance to the most recent data points, EMA can emphasize the latest trade periods.
Typically investors use 50-Day EMA and 200-Day EMA to measure average intermediate price and average long-term price, respectively. The formula to calculate EMA is given as under:
EMA= (Closing Price- EMA of previous day/bar) x multiplier + EMA o previous day/bar
Triangular Moving Average (TMA)
A Triangular Moving Average (TMA) is a double smooth arc that indicates that the data points are averaged twice. Furthermore, TMA is also another extension of WMA where the weight is applied in a triangular impression.
During a trending period, the TMA waves are farther away from SMA peaks; meanwhile, during a consolidation TMA and SMA waves will merge or flow closer. This MA can be calculated using the following formula:
TMA = (SMA1 + SMA2 + SMA3 + ……. SMAn)/n
Variable Moving Average (VMA)
A variable Moving Average or VMA is a weighted moving average that represents exponential development. This indicator was introduced by Tushar Chande in 1991 when he combined Volatility Index with MAs intending to extinguish trends when market conditions shift. Using the following formula, investors can work out VMA:
VMA = (alpha* Volatility Index*Closing Price) + (1- alpha *VI))*VMA [1]
Here alpha = 2 / (N + 1)
Super Trend
Supertrend is a trend indicator that shows the confirmation of a current trend and its strength.
Supertrend is going to ascertain whether an asset is going to persist in a bullish direction for a while or remain bearish for a considerable duration. The Supertrend indicator is shown either above or below the closing price of the asset under analysis.
The same indicator can also change color from green to red depending on different scenarios. When Supertrend shifts above the closing prices, it is denoted by green and grants a buying signal. On the other hand, when it drops below the closing point, it is red and read as a sell signal.
Parabolic Stop and Reverse (SAR)
Parabolic SAR is used to find out the potential reversal points in the market and understand where the prices are headed. It is indicated as a series of dots trending parallel to the price movement of an asset class.
When the dotted wave is below the price, it indicates a bullish signal; on the other hand, when the dotted wave of SAR is traveling below the price movement, it means that it is a bear signal.
Mean Reversion Indicators
Mean Reversion Indicators are the ones that show how far a current trend is going to last. These indicators also help investors find out the emergence of a retracement. Some of the popular Mean Reversion Indicators are as under:
Fibonacci Retracement
Fibonacci Retracement is a way for investors to determine support and resistance levels for asset calls. Fibonacci numbers were introduced by Italian mathematician Leonard Fibonacci who introduced them in Western Europe, exporting from Indian origin. Fibonacci numbers are found everywhere in nature.
In trading, Fibonacci retracement is present as three lines. The upper line is the baseline resistance level, while the lower tier is the support reference line. Fibonacci readings are indicated in percentages. The most common Fibonacci retracement numbers are 23.6%, 38.2%, 61.8%, and 78.6%. Sometimes, traders also use the 59% Fibonacci number unofficially.
Percentage Price Oscillator (PPO)
PPO is a technical indicator that indicates the correlation between two moving averages in the form of a percentage. These moving averages are 26 and 12-period Exponential moving averages. PPO is useful for measuring asset performance ratios, measuring volatility, and divergence that arises on account of trend reversals.
PPO is represented as two lines, namely the signal line, which is generated by EMA, and the PPO line, which moves slower than the signal line. When the PPO line crosses the signal line above from below, it is a buy signal and vice versa.
Regression Lines
Regression lines are seen as a method of viewing the movement of a dependent variable in connection to all its correlated variables. In the context of Mean Reversion, this can be seen as a regression line chart represented in three lines. The upper and lower lines of regression are distancing areas where the price has moved away from the middle regression line.
These upper and lower lines denominate extreme price points, and it means that the prices of the asset are likely to travel back to the main regression line in the middle.
Mean Reversion in Trading Pairs
Trading pairs is an effective technical analysis strategy that allows investors to find two highly dependent asset classes. Therefore, the investors can predict the other asset when the prices of one asset show any type of change. This type of Mean Reversion Trading pair is most popularly seen and used in the forex markets.
Investors can apply the same rule to cryptocurrency trading pairs such as USD and Bitcoin, among others, to find the signs of changes in one asset, and in the event that the other asset in the pair does not change, it can signal a strong reversion.
Volatility Indicators
Volatility Indicators are the scales for measuring the changes in price movements and their frequency. These indicators are often based on a comparison of the highest and lowest historical prices. Investors can learn about buying and selling ranges with volatility indicators, and it can, in turn, highlight the threshold of trend reversals for investors.
Here are some of the most popular Volatility Indicators:
Bollinger Bands
Contrary to popular belief, Bollinger Bands are not used for indicating breakout direction. In reality, Bollinger Bands are used to measure the amount of volatility present in the market and during high trading volume ranges.
The Bollinger bands are shown in the form of three-tier waves encapsulating the price movement of an asset. When these waves are moving closer, it means that the market is less volatile, and when these bands are increasing in distance, it means that the volatility is also increasing.
Average True Range
Average True Range or ATR is a type of market indicator that suggests how much an asset has moved in a given trading period. However, to calculate ATR, price trends are not taken into consideration directly.
The main job of ATR is to look at price gaps, and it also highlights the volatility of the market. In the same manner, ATR is used to measure the stop-loss and limit-order data points.
Standard Deviation
Standard Deviation is the method of measuring the square root of diversions in any arithmetic sequence as a technical indicator. Standard Deviation can be used to gauge the associated risk percentage associated with a given asset.
Furthermore, the same indicator can be used to find out the significance or impact of price movements in isolated trading periods.
Keltner Channel
Keltner Channel is another useful indicator to measure the volatility of a cryptocurrency. It also looks like a three-lined meandering wave that moves alongside price movement. The middle line is EMA which tracks the latest price variables.
The upper band is a bullish trend, and the lower one is a bearish line. Using the Keltner Channel, investors can easily view the shift towards bullish or bearish markets under the context of the latest price changes.
Momentum Indicators
Momentum indicators measure the rate of change or velocity of price movement by comparing current and previous closing prices. Momentum Indicators are:
Relative Strength Index (RSI)
The relative Strength Index measures the strength of the current trend and the velocity of change in the same trend. The RSI is seen as a range based on the price movement of the given asset. When RSI is 70 or greater, it means the asset is overbought.
On the other hand, when the cryptocurrency is persisting in at 30 or lower RSI, it means that the asset is oversold.
Stochastic Oscillator
A stochastic Oscillator is used to compare the closing price of an asset with contemporary asset classes based on the price movement spectrum during a given period. It is presented as a range between 0-100 and two wavelengths.
When the dual stochastic waves are in the upper range, it is a bearish signal, and when they are closer to the bottom, it is a bullish signal. The two waves represent the three-day SMA and the actual value of the oscillator. A stochastic Oscillator is often used in combination with RSI.
MACD
Moving Average Convergence Divergence, or MACD, is also a dual-lined range indicator. The objective of this indicator is to compare two moving averages. The comparative analysis of these two indicators reveals whether the current price movement is weak or strong.
When moving averages move apart, divergence happens, and momentum increases. Likewise, when moving averages close distance, the momentum declines, and convergence happens.
Ichimoku Kinko Hyo
IKH indicator is best for intermediate and long-term crypto graphics. It employs 4-time intervals where the first one represents the square root of the average maximum price and minimum interval.
When the spot price of an asset is higher in comparison to the indicator, it means that the asset is likely to keep appreciating.
Commodity Channel Index (CCI)
Commodity Channel Index or CCI is another range indicator that takes current price and average historical price variations. The main objective of CCI is to show the investors if the current price is greater or smaller than the historical average price.
Volume Indicators
Volume Indicators make use of the asset volumes to find the strength of trends and determine the direction of trading markets. Here are some of the most popular Volume Indicators:
Chaikin Oscillator
Chaikin Oscillator determines if an asset is oversold or overbought. The investors measure the current strength of the asset under the pretext of inflows and outflows within a specified trading period. Chaikin requires collecting at least 14 periods’ worth of price data collections to work out the final product.
Force Index
Force Index measures the power of increase or decrease in prices for a given asset. With this index, investors can ascertain if the market is bullish or bearish. The price index is based on three parts, namely the direction, range of price change, and trading volume.
When the market is afloat, Force Index is going to mimic the impact and travel above the centerline.
On-Balance Volume (OBV)
OBV measures the level of accumulation or distribution of a given cryptocurrency by pitting volume and price projections against each other.
Volume Rate of Change
The Rate of change in volume sheds light on all noteworthy increases in volume. The peak Volume rate of change is usually seen during extreme market states such as breakouts, bottoms, and tops.
Conclusion
Classifying Technical Indicators is not an easy task. Several indicators can be applied to measure multiple variables of the market. However, with a little practice and practical application of these indicators, novice investors can also learn to take a peek into the marketplace and improve their trading skills by gaining experience and making minor mistakes.