Glad to attend homework task in cryptoacademy. Today's homework task is for professor @reminiscence01 which is about Technical indicators.
In your own words, explain Technical indicators and why it is a good technical analysis tool.
Technical Indicators are mathematical tools developed on the basis of historical data like price, volume, volatility etc by analysts to find out areas of interest like support, resistance, entry and exit points. These mathametical calculations are graphically represented on chart of an asset to help traders in predicting future price and tremds of an asset.
Technical indicators are potential tools in the hands of traders as these are based on historical data in concordamce with human psychology. As psychology of traders tend to repeat and is therefore manifested through their actions on charts. Crypto markets are highly volatile, therefore use of indicators help us to mitigate the risk in addition to finding out areas of interest like ;
Indicators help us to find support and resistance which represent important zones.
Indicators help in finding entry amd exit points to maximise profit and minimise loss.
They help to predict the future trend of market and therefore aid in taking trading decisions.
They help to confirm the signals generated by price action or from other indicators.
Are technical indicators good for cryptocurrency analysis? Explain your answer.
Technical indicators are good for cryto analysis because they are developed by experienced people to predict different trading parameters. So by using these tools, we are indirectly taking advantage of their experience.
Moreover, it is an add on to the price action and therefore is an additional layer of security against risk. A trader trading on the basis of price action and technical indicator has less risk than the trader trading on the basis of price action only or on the basis of indicator only.
As different indicators of different categories show different types of signals. Making use of multiple indicators help one to analyse multiple signals at a particular point of time , which may not be otherwise possible for a trader.
Illustrate how to add indicators on the chart and also how to configure them. (Screenshot needed).
For this part of task, I'll be using trading view app. You can do it from official website of trading view too. Launch trading view app.
Select any trading pair. Chart of ththat trading pair with default settings will load.
Click on indicators and settings icon (fx) from the top or bottom menu . Usually menu is at top but i have menu at bottom.
Next we type name of indicator in the search box provided and select same Indicator from the suggestions. I type MAACD and select same from suggestions.
Go back to your chart and you will find MACD indicator applied over chart. Being an oscillator, it is seen at bottom of chart.
BNB/USDT chart on 5 min time frame before using any indicator. Arrow pointing to indicator icon
Search box and suggestions according to indicator name typed in search box
MACD indicator applied to chart
Configration of the indicator.
Double click on Indicator and chart settings will load.
Style settings -
Here we can choose color and precision of indicator.
In the Inputs settings, we have indicator period and signal. In MACD we have Fast length, slow length, smoothing etc
In the visibility, we have seconds , minutes, hours, days, weeks, months. Keep default settings for visibility.
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).
There are scores of indicators in the market meant for different purposes . As for classification of indicators are concerned, there are different classifications too. Let's look at important classifications below :
On the bais of location or indicators on chart,
there are two types of indicators:
- Overlay indicators : As name implies, these indicatoes overlay or superimpose over main price chart. Example, Bollinger Bands .
- Oscillator indicators : These indicators oscillate around their mid point between upper and lower limits. They determine strength and momentum of trend. Example, MACD.
The most important classification of indicator is functional classification according to which indicators are classified into three types:
- Trend following indicators
These indicators predict the direction of trend and also represent the strength of Trend. Trend is the direction of price in the market. It can uptrend, downtrend or sideways. In uptrend price of asset is increasing, in downtrend, it is decreasing and in sideways, market is in range. Wirh trend following indicators, traders can decide where to enter/ exit o4 hold. Examples simple and exponemtial Moving Averages , Average Directional Index ( ADX). Ichimoku Kinko Hyo etc
Volatility Based indicators
We know that volatility is the intrinsic property of the Crypto market . Volatility refers to change in the price of an asset. Volatility based indicators are used to look for rapid price swings in the market like Swing highs and Swing Lows and then take the advantage from these volatility like buying at low and selling at high. These indicators represent whether the volatility is high or low in the market and based on the trading style a trader can either enter or refrain from entering into the market. Some traders take advantage of high volatility and some traders avoid entering into the highly volatile market. Example are Bollinger Bands.
Average True Range (ATR) .
Momentum based indicators
These indicators help in predicting the momentum in price or we say they depict whether the market is overstretched due supply or demand. They help in predicting overbought and oversold regions and therefore indicate buy/sell signals. Examples are Relative Strength Index (RSI).
Moving Average Convergence Divergence (MACD)
Briefly explain the reason why indicators are not advisable to be used as a standalone tool for technical analysis.
No technical indicator is 100% correct in its working. Had it been so, than no body would ever lose money. We know that no one in trading has 100% winning rate. As indicators are made based on previous details of an asset like price and volume and it is not necessary that market may follow same and that too always in the future. More important than indicator is the price action which represents the current market scenario. As indicators are mathematical calculations and automatic, they generate signals based on feeded values and false positive amd false negative signals are common in case of all the indicators. So it is no5 advisable to use them alone.
Explain how an investor can increase the success rate of a technical indicator signal.
First and foremost thing is to know the working of the indicator, shortcomings of the indicator and settings of the indicator. Working of the indicator represents what the indicator is intended to show us . We know that no indicator is 100% correct so by knowing the limitations of the indicator beforehand, one may not fall into the trap of false positive and false negative signals generated by the indicators .
Moreover the settings of the indicator is an important parameter to know before following the signals generated by ndicator. For example, setting sensitivity of the indicatoe too high may generate frequent false signals and setting sensitivity of the indicator too low may lead to missing out of most of the trading opportunities in the market .
In addition multiple dicators ( 2 to 3) should be used to confirm the signals generated by one indicators by the other indicators. If a signal generated by one indicator is not complying with other or is opposite to that of the other, it means that the signal is doubtful and one should either avoid trading or take help of other indicators.
Technical indicators are tools developed by analysts to help traders predict future trends and spot entry/exit signals. These are not foolproof but when used properly, they mitigate risk of losses and maximise gain. In addition to price action, use of multiple indicators help traders increase their win rates .