What are Technical Indicators in Trading?

One of the ways to make money in the cryptocurrency space is through trading and if you’ve ever read or heard anything about it then you’ve probably come across a dozen buzzwords and complex terms that seem like a lot of jargon. These terms might make trading seem somewhat difficult but the good news is that with a little knowledge and a foundation in the basics, anyone can be a trader.

Some of the words you’ve heard are probably about the use of technical analysis and technical indicators for effective trading. In this article, we’ll break down the terms, explain how technical indicators work and give some examples to get you started.

What is technical analysis?

When crypto traders evaluate assets in the market, this is called technical analysis. This is done by evaluating and analysing the price and volume of these assets in an effort to spot possible trading opportunities.

Traders make use of technical indicators during technical analysis to better understand the behaviour of an asset and make predictions about the asset’s price. These indicators are a visual representation of the output of calculations which are based on an asset’s price and volume. Some of these indicators are Relative Strength Index, Moving Averages and Momentum among others.

It should also be noted that these trading indicators are not limited alone to the cryptocurrency market but are equally used by analysts and traders in other financial markets.

How technical indicators are used

While technical indicators are not a requirement for successful trading, they make for really good crypto trading tools because they help traders evaluate markets and identify both long and short term trading opportunities that could arise.

Mathematically, the crypto market is just a bunch of numbers: current price of an asset, price of an asset at a particular time in the past, volume and sizes of deals etc. However, these numbers are a lot and they are constantly changing which makes it difficult for a person to track and calculate all of the numerical data being provided by the market. So technical indicators use certain formulas to analyse trends in these figures.

Traders often choose one indicator as a rule and would go for the indicator that they understand and are comfortable with, and make use of the most important data so that the chart is covering most of the picture. However, some expert traders use two or more indicators at a time, as they look out for overlap that gives more backing to their predictions.

It is important to understand that while technical indicators show possible predictions on future prices, they are not 100% precise and are still just predictions.

Here are some of the most common examples of technical indicators:

The Relative Strength Index (RSI) is an indicator that moves between zero and a hundred to measure the speed and change of price movements. It is a great tool for crypto traders because it simply tells if an asset is overbought or undersold. If RSI surpasses 70, that means that an asset may be overbought indicating an opportunity to sell while an RSI below 30 means that the asset has been oversold and points to an opportunity to buy.

In addition, the RSI indicator also has a neutral level of 50 which is used to divide the chart into bearish and bullish areas. If the  RSI is above 50, then it’s bullish and if it is below 50 then it is bearish. The RSI is often set to measure changes in prices over a 14 day period but could be set to evaluate longer timeframes. It can be calculated with this formula:

Moving average is a common technical analysis indicator that is used to track trends and prices over a given period of time. There are two types of moving averages, Simple Moving Average (SMA) which is the most common and Exponential Moving Average (EMA).

The simple moving average is calculated by summing up the closing prices of a particular asset divided by the total number of days in that period. This indicator is great because it is able to follow and predict the developments of new trends and opportunities, it is also easy to customise and can be customised to fit long or short term periods.

This indicator represents upper and lower lines that are placed above and below a moving average of an asset’s price. These lines are called bands and represent volatility, as they expand volatility increases and as they shrink volatility equally reduces. Bollinger bands are a great indicator for finding highs and lows in an ever-changing market, they are also really great at assessing volatility. When an asset’s price is reaching the top Bollinger band, it is said to be overbought and oversold when it is reaching the bottom band.

A momentum indicator is a single line on a chart that traders use to measure the strength of a price’s movement and this is done by comparing closing prices over a period of time. By reading the momentum, traders can tell how fast the price of an asset is moving. If the momentum indicator is reading above 100 then the price is moving faster. Alternatively, if the indicator is reading below 100, the price movement is slow.

Technical indicators are not mandatory for successful trading activities. However, they can provide you with more knowledge and insights to make better informed decisions. By learning and practising more with technical indicators, you can support what you already know with additional tools.