Types Of Technical Indicators
- What Are Technical Indicators?
- Technical Indicators Benefits
- Types Of Technical Indicators
- Oscillator Indicators
- Trend-Following Indicators
- Volume and Volatility Indicators
- Relative Strength Index (RSI)
- Stochastic Oscillator
- Stochastic Oscillator RSI
- Moving Average Convergence Divergence
- Simple and Exponential Moving Averages
- Average Directional Index (ADX)
- Parabolic SAR
- On-Balance-Volume (OBV)
- Average True Range (ATR)
- Bollinger Bands
- Commodity Channel Index (CCI)
Whether using simple or more complex mathematical formulas, technical indicators are usually represented in a graphical form above or below a security's price chart. Anyone can then compare this indicator with the corresponding price chart of the security.
Technical indicators provide a unique perspective on the strength and direction of price action.
Here’s a list of the types of technical indicators.
The 4 Types of Technical Indicators
Trend indicators closely inspect the direction and strength of a trend by comparing prices to a pre-determined baseline. When prices are above the average, this indicates a bullish trend, with the reverse of prices below the average, suggesting a bearish trend.
Trend indicators are:
Moving Averages: used to identify trends and reversals, and to set up support and resistance levels.
Moving Averages are mainly divided into 2 types:
- Simple Moving Averages (SMA)
The Simple (or Smoothed) Moving Average (SMA) calculates the average price of an asset over a specified period, smoothing out price fluctuations. Crypto traders often use SMAs to identify trends and potential entry or exit points.
*Useful tip: experiment with different time frames to customize this indicator to your trading strategy.
- Exponential Moving Averages (EMA)
The Exponential Moving Average (EMA) is a more responsive indicator than the SMA, meaning it gives more weight to recent price data, painting a more vivid picture of the current market conditions.
- Parabolic Stop and Reverse (Parabolic SAR): used to find potential reversals in the market price direction, and identify suitable exit and entry points.
The indicator uses a trailing stop and reverse method, also known as“SAR,” and its calculation is based on the asset’s price and time and tends to rise gradually.
- Moving Average Convergence Divergence (MACD)
MACD is used to reveal changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
The Moving Average Convergence Divergence (MACD) is a versatile indicator that combines trend-following and momentum elements. It consists of three components:
- MACD Line
The MACD Line represents the difference between the 12-period and 26-period EMA.
- Signal Line
The Signal Line is a 9-period EMA of the MACD Line. It helps confirm trend changes and provides entry and exit signals.
On a chart, the MACD Histogram shows the difference between the MACD Line and the Signal Line. It helps traders visualize the strength of a trend.
- MACD Line
These technical indicators are used to identify the speed of price movement by comparing the current closing price to previous closes.
Momentum indicators only show if the price is trending up or down and if it is considered overbought or oversold based on past price ranges. By themselves alone, momentum indicators don’t provide too much valuable information and are usually used in combination with other indicators, like Moving Averages.
The most representative momentum indicators include:
Stochastic Oscillator: used to predict price turning points by comparing the closing price to its price range, helping traders identify potential trend reversals.
Commodity Channel Index (CCI): used to identify price reversals, price extremes, and trend strength, designed to help traders identify overbought (values going below -100) and oversold (values going over +100) conditions in a particular asset.
Relative Strength Index (RSI): used to evaluate the overbought or oversold conditions of the crypto market, as well as potential price reversals.
The RSI compares the average gain and average loss over a specified period of time, usually 14 periods.
These technical indicators measure the rate of price movement, regardless of direction.
Volatility indicators include:
Bollinger bands: used to identify breakouts from consolidation or trading ranges, helping traders assess the volatility and potential price range of crypto-assets.
Bollinger bands measure the highest or lowest price, by comparing them to previous trades.
Average True Range: used to assess the degree of price volatility to set stop-loss orders and determine position sizes.
The Average True Range (ATR) measures market volatility and how much an asset moves by taking into account the trading range of an asset during a specific period.
Standard Deviation: used to measure expected risk and to translate certain price movements.
Standard Deviation measures the degree of variation or dispersion of returns from the average (mean) return of an asset or portfolio over a specific period of time.
These technical indicators measure the strength of a trend based on the volume of shares traded.
Chaikin Oscillator: used to understand the strength of buying and selling pressure in security and helps traders and investors make decisions about potential trend reversals or confirmations.
Chaikin Oscillator measures the momentum of the Accumulation Distribution Line (ADL), which is an indicator of buying and selling pressure.
On-Balance Volume (OBV): used to identify trends, support and resistance levels, and divergences.
The OBV measures the level of accumulation or distribution, by comparing volume to price.
Volume Rate of Change: used to confirm trends, signal reversals, and spot breakouts.
Highlights increase in volume, a situation that happens at market tops, bottoms, or breakouts.
Volume Rate of Change (VROC) is a technical indicator that measures the percentage change in volume over a given period of time.
3 Main Functions of Technical Indicators
Indicators serve three broad functions:
- To alert
Indicators act as a signal, notifying traders they should study and assess price action more closely. The alert could indicate traders to look for a break of support or watch for a resistance breakout.
- To confirm
Some indicators can confirm what other technical analysis tools indicate. For instance, a corresponding moving average crossover could confirm a breakout on the price chart.
- To predict
Technical indicators can be used to predict the direction of future prices. Based on price patterns that tend to repeat, technical indicators can predict a similar future price outcome. A common example is carefully looking at price patterns by combining trend, momentum, and volume indicators.
Useful Tips for Novice Traders
Key principles for a winning trading strategy as a novice trader:
- Define clear trading goals
After getting to know more about technical indicators, you should define your trading goals and risk tolerance. Decide if you’re looking for short-term gains or rather long-term investments and how much risk are you willing to take.
- Choose and combine the right technical indicators
First, figure out your trading style—whether you're a day trader, swing trader, or long-term investor. If you’re a day trader, you’d want indicators that generate many trading signals in a day (e.g., the ATR).
Based on this, choose and use more technical indicators in tandem to build a successful strategy. For example, you might use moving averages to identify trends and RSI to confirm momentum.
- Backtest Your Strategy
Before risking your capital, backtest your strategy using historical data. This step will help you gauge its effectiveness and make necessary adjustments.
- Rely on a user-friendly platform like Altrady
Altrady streamlines your trading process, helps you manage risk and increases profitability with simple and quick automation tools.