Technical indicators are mathematical and statistical tools used by investors and traders to further inform their technical analysis. Technical indicators provide another lens in which investors and traders can analyse trends, display price averages, measure volatility and more.
This topic may not be for everybody, but having at least a basic introduction to common trading indicators and tools can improve your interpretation of charts and better inform your investment and trading decisions.
Whilst some trading indicators are more commonly used than others, there is no indicator or tool that is considered ‘the best’. Often, traders and investors will use a range of indicators over multiple timeframes to assist in their information gathering.
Common Indicators & Tools
A moving average (MA) is an indicator that displays the average value of historical prices over a specific number of time frames such as 15, 20, 30, 50, 100, and 200. For example, the 200-day MA plots a line on a chart that represents the average price over the previous 200 days. MAs are often monitored across several timeframes to gauge the direction and strength of short and long-term trends as well as identify key support and resistance levels.
A common type of MA used by cryptocurrency investors and traders is the exponential moving average (EMA), which gives more weight to recent data over older data points – compared to a standard MA which gives equal weight to all data points. (By contrast, standard MAs weights all data points equally.) Neither MA nor EMA is better than the other. Investors and traders use both depending on their goals, objectives and strategy.
Investors and traders often compare multiple MAs at once by overlaying them on a single chart, paying attention to the divergence and cross-overs between them to better identify the differences between short- and long-term trends. For example, an investor or trader may use both the 50-day MA and 200-day MA to observe the differences between the 50-day and 200-day MAs. By observing the deviation and crossover points of each MA line, investors and traders can interpret bullish and bearish signals to further inform their price forecasts.
Like any indicator, the MA is not always accurate in forecasting price action. It’s important to have a range of technical indicators in your arsenal on which to inform your opinion of future potential outcomes.
Relative Strength Index
The relative strength index (RSI) is a momentum indicator that uses recent previous price strength and weakness points to calculate a value that indicates whether a tradable is currently overbought or oversold. This is typically used by investors and traders to forecast the likelihood of a trend continuation or reversal.
The RSI calculates a value between 0 (indicating oversold) and 100 (indicating overbought). Traditionally, a value of 70 or above indicates overbought territory and, a value of 30 or below indicates oversold territory.
Moving Average Convergence Divergence
The moving average convergence divergence (MACD) is another momentum indicator that plots a line to represent the divergence between two MAs. A signal line (an EMA of the MACD line) is then plotted alongside the MACD acting as a gauge for momentum. The MACD also has a histogram setting that allows investors and traders to visualise the relationship between the MACD and the signal line to more simply identify bullish and bearish signals and changes in trend.
Bollinger Bands (BB)
Bollinger bands are used by investors and traders to identify whether prices may be overbought or oversold relative to a moving average of previous price points. BBs consist of 3 lines: an upper band (top), a lower band (bottom), and an MA (middle). The MA we’re already familiar with, but the upper band and the lower bands represent values that are 2 standard deviations either side of the MA. Two standard deviations are used to statistically ensure that 95% of prices fall between the MA and the upper or lower bands.
When the distance between the upper and lower bands tighten or widen, this indicates a change in volatility and when the current price approaches the upper or lower bands investors and traders can often interpret whether a tradable is overbought or oversold.
Bollinger bands are more typically used as a confirmation of other signals and indicators, rather than used on their own.
Other common indicators and tools include:
- Stochastic Oscillator
- Fibonacci Retracement
- Ichimoku Cloud
- TD Sequential
- Standard Deviation
- Average Directional Index
This information is intended as a basic introduction to technical indicators and is not intended as trading education. If this topic interests you, we encourage you to explore the options in the Trading Education section of our Members Discounts area where you can further invest in your knowledge and understanding of TA.