Many people find technical indicators interesting, especially for new traders. Indicators can feed back clear trading signals and tell you where to buy or sell.
Technical indicators are calculated based on past price data, therefore, they are lagging in nature, but this does not mean that they are not useful for trading.
With the help of indicators, traders can more quickly assess the market's current volatility, trend strength, or whether the market is overbought or oversold.
However, trading strategies should not rely solely on indicators. They should be used as a confirmation tool, and trades should not be chosen simply because of the signals the indicators bring.
1. Fibonacci Fibonacci levels
Although Fibonacci levels are not considered a conventional technical indicator, they are still one of the most effective tools for traders. The Fibonacci sequence refers to 1, 1, 2, 3, 5, 8, 13, 21, 34, 55... Each number in the sequence is the sum of the previous two numbers. If we divide two consecutive numbers, the result is always 0.618, also known as the golden ratio. The 61.8% Fibonacci level is used to identify possible retracements in trending markets, with other major levels including 38.2% and 50%.
When trading Fibonacci levels, rather than focusing too much on precise numbers, it is better to think of Fibonacci levels as a range where price has a higher probability of reversing and continuing the underlying trend. For example, the area between 38.2% and 61.8% can be considered an important support area in an uptrend, or a resistance area in a downtrend.
2. Stochastics stochastic indicator
The stochastic indicator was originally used in securities trading to compare the true price of a security to a series of prices over a certain period of time. The stochastic indicator is somewhat similar to the RSI indicator. Traders also use the stochastic indicator to find overbought and oversold levels to decide whether to buy or sell. Unlike the RSI indicator, the Stochastic indicator focuses on the 80 and 20 levels.
3. CCI trend indicator
CCI was proposed by Donald Lambert in 1980. It compares the current price with the average price in a specific period to determine whether the market is outside the normal distribution range. Approximately 75% of CCI values are between -100 and +100, with values above this range indicating very large price changes relative to the average price. The full English name of CCI is Commodity Channel Indicator, but it can be used in different types of markets, including stocks and foreign exchange markets.
Day traders often apply the CCI indicator to short-time period charts in the hope of obtaining more trading signals. When the CCI rises above +100 it means a buying opportunity, and when the CCI drops below -100 it means a selling opportunity.
4. Bollinger Bands Bollinger Bands
Another popular indicator is Bollinger Bands, which are based on simple moving averages and can be used to identify current market fluctuations. Bollinger Bands include three trajectories: the middle one is a simple moving average, the upper and lower trajectories are drawn based on the standard deviation from the simple moving average, and the two trajectories form a band-shaped interval.
Since standard deviation is a measure of volatility, the larger the band, the greater the volatility, and vice versa. From this, trading strategies such as the Bollinger Band Squeeze were developed.
Traders who believe volatility will increase can go long when the latest candle closes above the band and go short when the latest candle closes below the band. About 95% of price movements actually occur within two standard deviations above and below the simple moving average.
5. RSI relative strength index
The RSI index was first created and proposed by J. Welles Wilder in 1978 and is still widely used today. RSI measures the magnitude of recent price changes and has a reading between 0-100. This indicator is primarily used to determine if the market is overbought or oversold. A value above 70 usually means the market is overbought, while a value below 30 means oversold.
A common trading strategy based on RSI is to buy when the RSI falls below 30 points and sell when it rises to 70. However, the RSI trading strategy is more suitable for use in non-trending markets. If the market is trending, the RSI indicator may remain overbought or oversold for a long period of time. Therefore, when trading, it is best to overlay different indicators and increase the use of signal filtering tools.
6. MACD exponential smoothing moving average
The MACD indicator is a very powerful technical indicator that combines trend following and oscillator indicators. MACD consists of two lines and MACD histogram. One line represents the difference between the two moving averages, and the other line is the moving average of the first MACD line.
The MACD histogram represents the difference between the two MACD lines. Essentially, if the two lines cross, the value of the MACD histogram returns to 0. When the two lines diverge from each other, the MACD column begins to grow longer.
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