Warmly welcome to my homework post for professor @reminiscence01.
First of all, I like to thank @reminiscence01. and Crypto Academy for providing such beautiful and practical lessons and gives us chance to complete the homework post. Now let's begin the homework post.
Q1. a) In your own words, explain Technical indicators and why it is a good technical analysis tool.
Technical indicators are just formulas apply to the current and historic price data and mathematical equations to plot lines and histograms on your chart. Some indicators can work with closing price and some can work with volumes, opening price, and so on. It includes the sets of data points that you can get by doing calculations.
There are many technical indicators used by traders and investors. Traders can choose as per their strategy and needs. By using the indicators trader is choose the entry point and exit point of that particular financial assets
Why it is a good technical analysis tool?
The purpose of trading indicators is to help simplify what price is doing a candlestick chart itself can be very confusing at times so trading indicators are meant to clean up some of that noise.
In general, to help us have consistency so essentially trading indicators can help to provide clarity on market condition, they can even help us to identify the trend, identify the areas of value. Help us to find entry points and even help us determine where we want to place our stops and targets.
As you saw many advantages of trading indicators and because of them traders can earn profit and maximize their earning by improvising their strategy.
Q1. b) Are technical indicators good for cryptocurrency analysis? Explain your answer.
As you know the cryptocurrency market is a highly volatile market and it is working day and night 24 x 7. This makes trading a little bit difficult in the cryptocurrency market. As we saw many times in the cryptocurrency market it was upside or downside within 2-3 days and this become very dangerous for the crypto traders.
As in such situations, technical indicators can give alerts to traders by showing the broken support. It was very important in this market and it was also used to confirm another technical analysis tool or fundamental analysis. In this uncertainty of the crypto market, technical indicators are working as a guide and show the right way to the traders. Some traders and investors also use the technical indicator for future price projection.
In the crypto market, technical indicators are so helpful to traders for making profitable trades. So overall technical indicators are good in the cryptocurrency analysis.
Q1. c) Illustrate how to add indicators on the chart and also how to configure them. (Screenshot needed).
Binance has good UI and it has accurate charts and you don’t even need to create an account for chart analysis and to add the indicator so I am here using the Binance platform to add the technical indicators and I will show them how to add and configure technical indicators in the below simple steps:-
Adding the technical indicators
Step 1:- Visit the Binanceplatform and Click on the market tab from the menu bar.
Step 2:- After clicking on the market tab you will see the below screen after that choose the desired crypto pair. I am choosing the BTC/USDT for this post.
Step 3:- After clicking on the crypto pair you will see the below pop-up to choose the advanced option and click on the submit button.
Step 4 :- After that you will see the below screen than click on the technical indicator option.
Step 5:- After clicking on the technical indicator option you will get the list of technical indicators and you can choose whichever indicator you want.
Step 6 :- I am selecting the moving average (MA) you can select the technical indicator as per your trading strategy.
Step 7:- After click on save you will see the technical indicators are as shown in the below charts.
Configure the technical indicators
Step 1:- Click on the setting button from the chart. It was kind of difficult to see but it can be found in the row of your technical indicator.
Step 2:- you can change the number of days or you can change the technical indicators from the below modal it was pretty easy to modify it and save the change so it can reflect on the chart immediately.
Q.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).
I will explain different categories of the technical indicators as below with their examples.
Trend indicator helps us to measure the strength and direction of the trend. In this, some prices are used to calculate the average and that would be the baseline. As the current price of the financial asset goes above the average then can be thought of it was bullish or uptrend. If the price goes below the average it can be single as a bearish trend.
In the trend indicator, I will show you the moving average(MA) example.
Moving average(MA) is very easily shown the price action and helps us to know the market direction. Moving average(MA) is worked on the past or history data that’s the reason it's also known as a lagging indicator. It shows a better result as we see the data of long period such as 200-day Moving average.
As you see in the below chart price is stays above the Moving average(MA) of 200 Days and 50 Days will be considered as a bull market. Many traders and investors use the Moving average(MA) before investing in the financial asset and if it's in a bull trend then they will place the order. If the price of a financial asset is below the Moving average(MA) that time many traders avoid that particular financial asset.
Momentum based indicators
Momentum based indicator helps to identify the speed of price movement by comparing prices of different times. It appears as a line below the charts that show the momentum changes when there is a difference between price and moment indicator it can treat as a change in future price. I will show the RSI example to explain the momentum indicator.
As you see in the below image RSI is showing below the price chart and it shows the rate of financial assets where the price is change and traders can identify the uptrend when the price changes while momentum is increasing and if momentum is decreasing while price going up that will be signal or alert that downtrend for that particular asset will shows soon.
In general when RSI is above 70 then think that financial asset is overbought and when it falls below 30 then it will consider as oversold and in this extreme condition we will see the trend reversal.
It was based on the changes in the highest and lowest of historical prices and it will provide very important information about the range of buying and selling and helps traders to predict the data points where the market will change the direction.
For this, I will show the Bollinger bands examples.
After adding the Bollinger band it will look like this and it helps us to know the overbought and oversold condition. If the price is closer to the upper band then it can indicate the overbought condition and it's opposite if the price is closer to the lower band then it shows the oversold condition.
Q.2. b) Briefly explain the reason why indicators are not advisable to be used as a standalone tool for technical analysis.
There are a lot of technical indicators available and each indicator has its own formula and calculations. And mainly it gave you accurate results if you configure them correctly and it's pretty hard for the beginners and Indicators are meant to show the data for you but its interpretation is more important. If a person is not able to interpret them correctly then it also is affected on the profit of the trade.
To use the technical indicators and interpret the data correctly needs experience and indicators are give the best result when they use with fundamental analysis.
Sometimes indicator shows the uptrend as per the price data but if some bad news about that assets comes then it will definitely go into the downtrend.
For the more profitable trades, it's better to use the indicators with other tools as the fundamentals of the assets is strong and by using the technical indicator trader identify the uptrend of the asset then it will give the best results.
Q.2. c) Explain how an investor can increase the success rate of a technical indicator signal.
The first thing is investor should improve their skills in data interpretation. Technical indicator's success rate totally depends on how traders interpret the information getting from the technical indicators. As technical indicators help to identify the reversal of the trend and price range of the particular financial asset will help traders to make profitable trades.
To improve the success rate of technical indicators should use fundamental analysis. It will give the best results to the investor and traders in a short and long period. To rely only on a single indicator may be risky and dangerous sometimes. If traders or investors check trends with 2-4 technical tools then it should help to increase the success rate of technical indicators.
Lastly, traders should have to know better configuration for the technical indicators as it will give a proper alert or confirmations for the trade. If the user wrongly configures the technical indicators then it will be more dangerous and their trades will turn into losses.
This lesson gives the idea of all the technical indicators and shows us how can use the technical indicator and how to identify the bullish and bearish trend using the technical indicators which is very helpful in practical life.
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