Hello Professor @reminiscence01, I'm happy to be in your class again to learn from you. I enjoyed your lecture and made some notes for me to look deeper into the various indicators that can help in trading. Here's my homework post, I hope you like it as much as I do.
1.a) In your own words, explain Technical indicators and why it is a good technical analysis tool.
b) Are technical indicators good for cryptocurrency analysis? Explain your answer.
c) Illustrate how to add indicators on the chart and also how to configure them. (Screenshot needed).
Technical indicators are heuristic signals or mathematical calculations that use the past information of an asset like price movements and volume amongst other factors to graphically help predict future market price and trends or to help traders who use technical analysis.
The idea of technical indicators is to use historical price data and other information of an asset to determine good entry and exit points for trades. Thus it uses the idea of Technical Analysis coupled with mathematical calculations to serve as a variety of indicators, each one with its own use. By using technical analysis, the buying and selling of a particular asset or supply and demand by traders is tracked and used in the future to identify these areas as the price of an asset is expected to react to these previous areas in the future. By using these and other previous opening and closing prices of an asset over time helps generate accurate signals for making future analysis and well-informed trade decisions especially for day to day trading.
The basic functions of technical indicators are to predict the future price of an asset, serve as a support tool or a conformation tool to avoid prices lags, false signals and breakouts as well as alert traders on where to take profits and even alert them on the beginning of new trends like when there's a price breakout.
Technical Indicators & Crypto Analysis
Technical indicators are used to help predict the market trend of assets and cryptocurrencies, being digital assets, are no exception. Technical indicators can be used to view the strength and direction of the price of a cryptocurrency as well as it's support and resistance levels. Knowing the support and resistance of a cryptocurrency you are trading is good because it indicates when the price drops or climbs higher. From these it's clear that technical indicators are good for cryptocurrency analysis. Some other reasons are:
- Helps traders understand the market condition:
Technical indicators are important in understanding the market condition of a cryptocurrency. It can determine the momentum of the price of a cryptocurrency and whether it's trending or ranging and this helps investors and traders make use of the market's state and make good trading decisions.
The vortex indicator can help you understand the current buying and selling of a cryptocurrency in the market.
Good trade management:
Technical indicators provide traders with early trading signals to help increase the winning ratio of a trade position by reducing the stop-loss size. In the same vein, they provide areas of support and resistance which are stop-loss and take profit areas. This helps to minimize loss and maximize profits.
Technical indicators are commonly used as signal conformation for conditions for a cryptocurrency in the market in order not to be tricked by false breakouts and signals. This is normally achieved by combining technical indicators of the same category to confirm a trading signal.
Adding Indicators To Charts
Adding indicators on charts is important to be able to predict the price of an asset or currency and thus lots of indicators are provided by the platform to help with that.
To add an indicator in a chart you first click on the indicators & strategies button, fx shown below to view all the indicators and strategies.
In the search bar enter the name of the indicator you want to use and click on it to add it to the chart. Over here I went for the Relative Strength Index (RSI)
2.a) Explain the different categories of Technical indicators and give an example of each category. Also, show the indicators used as an example on your chart. (Screenshot needed).
b) Briefly explain the reason why indicators are not advisable to be used as a standalone tool for technical analysis.
c) Explain how an investor can increase the success rate of a technical indicator signal.
Categories of Technical Indicators
There are different categories of technical indicators available all focusing on different areas such as the trend, price ranges and the strength of asset. There 4 general categories of technical indicators and these are:
Trend indicators or Trend-Following work by measuring the direction and strength of a trend, by using various price averaging methods to establish a baseline to compare prices with. When the price moves above the baseline it is deemed a bullish trend and when it goes below the baseline it's deemed a bearish trend. The most popular trend indicator is the Moving Averages(MA) but others like Moving Average Convergence Divergence (MACD) and Parabolic Stop And Reverse (Parabolic SAR) are pretty useful too. These help traders understand the current market trend and the strength and weakness of a market trend. By using these, traders are able to make good trading decisions.
How the Parabolic SAR looks
Momentum indicators/Oscillators work by comparing previous prices to help identify the speed of a price's movements as well as analyze volume or simply put, how far the price of an asset has travelled. They're calculated by comparing previous closing prices and and the current closing price. Indicators like these usually appear as a line below the chart and oscillates as momentum varies. These can be used to determine when an asset is being overbought of oversold. When there's a split between price and a momentum indicator, then it signals a price change for the future. Some examples are the Stochastic Oscillator, Relative Strength Index (RSI) and Commodity Channel Index (CCI)
How the CCI looks
These indicators focus on measuring the rate of price movement, neglecting the direction. Basically this measures the market swings or fluctuations in the market. This is based on the change of the highest and lowest historical prices. They're useful for obtaining information regarding the buying and selling of a particular asset in a market and give predictions on areas where the market may change direction. These can be used to buy at relatively low prices and sell at relatively high prices. Some examples of these indicators are Bollinger Bands, Average True Range and Standard Deviation.
How the Average True Range looks
These indicators measure the strength of a trend based on the volume of assets traded or confirm the trading direction of a market. This is done by using various averaging or smoothening of raw volume. A strong trend is determined when there's an increase in the volume. It's worth noting that increase in trading volume usually leads to large movements in price. Some of these indicators are Volume Rate of Change, Chaikin Oscillator and the On-Balance Volume(OBV).
How the OBV looks
Indicators Shouldn't Be A Standalone Tool Technical Indicators
It is not advisable to use indicators as standalone tool for technical analysis because indicators usually use selected information from an asset to produce results. Markets are generally volatile with varying conditions every moment, depending on a single indicator will make you susceptible to false signals and breakouts or even lagging behind the current market price which in the long run can make traders incur losses. It's best to always confirm any trend or signal with another indicator preferably of the same category.
Increasing The Success Rate of Technical Indicator Signals
Any trader or investor can increase the success rate of a technical indicator signal by studying it well and its applications to know its configurations before using it. Traders can also pick technical indicators that best suits their trading style.
Technical indicators are important technical analysis tools that all investors and traders should aim to study and use so they can understand the market and make good decisions. Traders can use them as support tools and conformation tools as well. Technical indicators can be used on any asset including cryptocurrencies and reap good profits from trades.
All screenshots were taken by me on TradingView.com