Key takeaways
Technical analysis (TA) indicators help traders understand asset price movements, making it easier to identify patterns and potential trading signals.
Among the many TA indicators available, some of the popular options include RSI, moving averages, MACD, StochRSI, and Bollinger Bands.
While support indicators can be very useful, interpretation of their data can be subjective. To reduce risks, many traders use TA indicators in combination with fundamental analysis and other methods.
Introduction
Chart indicators are the battle-tested weapons of choice for technical analysts. Each player will choose the tools that best suit their unique play style and then learn to master their craft. Some like to watch market momentum, while others want to filter out market noise or measure volatility.
But what are the best technical indicators? Well, every trader will tell you something different. However, there are some very popular ones, like the ones we list below (RSI, MA, MACD, StochRSI and BB). Interested in knowing what they are and how to use them? Keep reading.
Why technical analysis indicators?
Traders use technical indicators to gain additional information about the price action of an asset. These indicators make it easy to identify patterns and detect potential buy or sell signals in the current market environment.
There are many types of indicators and they are widely used by day traders, swing traders, and sometimes even long-term investors. There are also professional analysts and advanced traders who create their own custom indicators.
In this article, we will provide a brief overview of some of the most popular technical analysis (TA) indicators that can be useful in any trader's market analysis toolkit.
1. Relative Strength Index (RSI)
The RSI is a momentum indicator that shows whether an asset is overbought or oversold. It does this by measuring the magnitude of recent price changes. The standard setting is the previous 14 periods (14 days for daily charts, 14 hours for hourly charts, etc.). The data is then displayed as an oscillator which can have a value between 0 and 100.
Since the RSI is a momentum indicator, it shows the rate (momentum) at which the price is changing. This means that if momentum increases as the price rises, the uptrend is strong, meaning more buyers are stepping in. Conversely, if momentum decreases as the price rises, it may indicate that sellers could soon take control of the price. market.
A traditional interpretation of the RSI is that when it is above 70, the asset is likely overbought, and when it is below 30, it is likely oversold. As such, extreme values may indicate an impending trend reversal or retracement. Still, it would be best not to think of these values as direct buy or sell signals. As with many other technical analysis (TA) techniques, the RSI can provide false or misleading signals, so it is always useful to consider other factors before entering into a trade.
Are you eager to learn more? Check out our article on the Relative Strength Index (RSI).
2. Moving Average (MA)
The goal of using a moving average on financial charts is to smooth out the price action and highlight the direction of the market trend. Since they are based on past price data, moving averages are considered lagging indicators.
The two most commonly used moving averages are the simple moving average (SMA or MA) and the exponential moving average (EMA). The SMA is plotted by taking price data from the defined period and generating an average. For example, the 10-day SMA is plotted by calculating the average price of the last 10 days. The EMA, on the other hand, is calculated in a way that gives more weight to recent price data. This makes it more reactive to recent price action.
As mentioned, the moving average is a lagging indicator. The longer the period, the greater the delay. As such, the 200-day SMA will react more slowly to the recent price action than the 50-day SMA.
Traders often use the relationship of price with specific moving averages to measure the current market trend. For example, if the price remains above the 200-day SMA for an extended period, many traders may consider the asset to be in a bull market.
Traders can also use moving average crossovers as buy or sell signals. For example, if the 100-day SMA crosses below the 200-day SMA, it can be considered a sell signal. But what exactly does this cross mean? Indicates that the average price of the last 100 days is now below that of the last 200 days. The idea behind selling here is that short-term price movements are no longer following the uptrend, making it more likely that the trend will reverse soon.
Are you eager to learn more? See our article on moving averages.
3. Moving Average Convergence and Divergence (MACD)
The MACD is used to determine the momentum of an asset by showing the relationship between two moving averages. It is made up of two lines: the MACD line and the signal line. The MACD line is calculated by subtracting the 26 EMA from the 12 EMA. This is then plotted over the 9 EMA of the MACD line, the signal line. Many charting tools also often incorporate a histogram, which shows the distance between the MACD line and the signal line.
By looking for divergences between the MACD and price action, traders could better understand the strength of the current trend. For example, if the price makes a higher high, while the MACD makes a lower high, the market may reverse soon. What does the MACD tell us in this case? That price increases while momentum decreases, so there is a higher chance of a pullback or reversal.
Traders can also use this indicator to look for crossovers between the MACD line and its signal line. For example, if the MACD line crosses above the signal line, that may suggest a buy signal. On the contrary, if the MACD line crosses below the signal line, that may indicate a sell signal.
The MACD is often used in combination with the RSI as they both measure momentum but using different factors. Together they are supposed to offer a more complete technical perspective of the market.
Are you eager to learn more? See our article on the MACD.
4. Stochastic RSI (StochRSI)
The Stochastic RSI is a momentum oscillator used to determine whether an asset is overbought or oversold. As the name suggests, it is a derivative of the RSI as it is generated from RSI values rather than price data. It is created by applying a formula called the stochastic oscillator formula to ordinary RSI values. Typically, Stochastic RSI values range between 0 and 1 (or 0 and 100).
Due to its higher speed and sensitivity, the StochRSI can generate many trading signals that can be difficult to interpret. Generally, it tends to be most useful when it is near the upper or lower ends of its range.
A StochRSI reading above 0.8 is usually considered overbought, while a value below 0.2 can be considered oversold. A value of 0 means that the RSI is at its lowest value in the measured period (the default setting is usually 14). On the contrary, a value of 1 represents that the RSI is at its highest value in the measured period.
Similar to how the RSI should be used, an overbought or oversold StochRSI value does not mean that the price will surely reverse. In the case of the StochRSI, it simply indicates that the RSI values (from which the StochRSI values are derived) are near the extremes of their recent readings. It is also important to note that the StochRSI is more sensitive than the RSI indicator, so it tends to generate false or misleading signals more frequently.
Are you eager to learn more? Check out our article on Stochastic RSI.
5. Bollinger Bands (BB)
Bollinger Bands measure market volatility, as well as overbought and oversold conditions. They are made up of three lines: an SMA (the middle band) and an upper and lower band. Settings can vary, but typically the upper and lower bands are within two standard deviations of the middle band. As volatility increases and decreases, the distance between the bands also increases and decreases.
Generally, the closer the price is to the upper band, the closer the recorded asset may be to overbought conditions. Conversely, the closer the price is to the lower band, the closer it can be to oversold conditions. For the most part, the price will stay within the bands, but on rare occasions it may break above or below them. While this event may not be a trading signal in itself, it can act as an indication of extreme market conditions.
Another important concept of balls is called grip. It refers to a period of low volatility, where all bands become very close to each other. This can be used as an indication of possible future volatility. Conversely, if the bands are very far apart, a period of lower volatility may follow.
Are you eager to learn more? See our article on Bollinger Bands.
Final thoughts
Although the indicators show data, it is important to consider that the interpretation of that data is very subjective. As such, it's always helpful to take a step back and consider whether personal biases are affecting your decision-making. What may be a direct buy or sell signal for one trader may simply be market noise for another.
As with most market analysis techniques, indicators work best when used in combination with each other or with other methods, such as fundamental analysis (FA). The best way to learn technical analysis (TA) is through lots of practice.
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