Technical indicators are tools for crypto traders that help them forecast the future direction of financial markets such as BTC or ETH.
Definition: A technical indicator is a calculation that is applied to price or volume data to help traders anticipate where the price of an asset is going to go.
Traders use technical indicators to help analyze past price and volume performance to identify potential trade entry and exit points. They generally appear in two major forms, as an Overlay or as an Oscillator:
Overlay - Overlay indicators such as moving averages are plotted directly over the price chart of an asset using the same scale. Overlay indicators give traders key data, such as visual trendlines and support and resistance levels.
Oscillators - Oscillating indicators like the Relative Strength Index (RSI) are generally displayed in a separate area of the price chart. Their data points fluctuate above and below a center line or between multiple levels. Their value changes over time.
There are dozens of popular technical indicators that are widely used in crypto markets, including moving averages, Bollinger Bands, Ichimoku Clouds, Moving Average Convergence Divergence (MACD), and many more. To use a technical indicator, traders simply go to the trading chart of a particular asset, select the indicator, and choose the parameters.
Leading vs. Lagging indicators
Leading and lagging indicators are both useful to crypto traders. Leading indicators give you predictive hints on future movement and reversal points, while lagging indicators help you to identify and confirm trends.
Leading - Leading indicators like Fibonacci Retracement can be applied to a price chart using past data to predict future price movements, “leading” a price since it is anticipating trends or price movements. The idea of leading indicators is to help the trader create entry or exit points near the beginning of a potential new future trend.
Lagging - Lagging indicators like RSI are applied by traders to analyze market trends using averages. Often used for confirming a current price movement or trend, lagging indicators “lag” the market to confirm trend directions before a trader places an order.
How to Trade with Indicators
Leading & lagging indicators - Leading indicators give faster signals on proposed moves, so traders use them to create entry or exit points near the beginning of a potential trend. Since lagging indicators confirm trends, traders use them for confirmation before placing their buy and sell orders. Using them together gives the trader tools for both predictive analysis and trend confirmation.
Combining indicators - Traders use combinations of indicators to increase their forecasting accuracy, like using MACD plus RSI to pinpoint a trade entry.
Using bots - Traders use bot strategies like Mean Reversion or Bollinger Bands to manage automated trades based on leading indicators.
Technical Indicator Examples and How to Use Them
What are they? Moving averages track the average price of an asset over various time spans, such as a 10-day Moving Average (MA). The MA indicator is drawn across the price chart and the longer the time span, the more smooth the line appears.
How are they used? Traders often will use multiple moving average lines in two ways: looking for when the moving average crosses over the price line, or finding crossovers with other MAs with different time spans.
What is it? The Moving Average Convergence Divergence (MACD) is a momentum indicator that follows trends by showing the relationship between 2 (or more) moving averages.
How is MACD used? Traders apply the MACD indicator and look for multiple signals. For instance, when a longer term (i.e. 26-day) moving average crosses above the short-term moving average (i.e. 12-day), it may indicate a bullish trend. Quadency’s MACD bot enables traders to automate their trades based on MACD during trending markets.
What are they? Bollinger Bands help traders measure a market’s volatility and potentially identify overbought or oversold conditions. The bands are made up of two standard deviations and placed in relation to a simple moving average.
How is it used? When the price of an asset moves closer to the upper bands, an overbought condition is generally indicated (possible sell signal). When it touches the lower band, the market is considered oversold (possible buy signal).
What is it? - Relative Strength Index (RSI) is an oscillating indicator that measures the speed and velocity in direction changes of an asset’s price, giving it a value between 0 and 100.
How is it used? When RSI goes below 30, the asset is considered oversold and upward price movement is predicted. If RSI is over 70, it’s considered in an overbought condition and a downward correction is predicted. If RSI crosses the midpoint value after being above or below that level for a period of time, a potential trend reversal may be indicated.
Technical indicators are commonly used today by traders to help them navigate volatile crypto markets and manage risk. You can explore and backtest all the available indicator strategies on Quadency’s smart terminal and learn hands-on how they work and what valuable insights they provide. When you’re ready to automate your trades using technical indicators, Quadency has a bot for that!
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Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.