What Are Technical Indicators?

As one of the core components of technical analysis, technical indicators are mathematical calculations based on historical price, volume, or open interest data.

They help crypto traders predict future price movements and market trends, so they can decide whether to enter or exit positions, mitigating risks and maximizing profits.

A technical indicator is usually a graph with a comparison table with the corresponding price chart for analysis, using past price and volume trends. Indicators can decode investors’ behavior and combine it with historically adjusted returns, hinting at future price activity trends.

How Do Technical Indicators Work?

Technical indicators are used to analyze both short-term price movements and long-term investments.

They use mathematical and statistical data to measure the market's psychology, comparing the price of a cryptocurrency in relation to previous prices. All this data is conveyed into easy-to-understand visual representations displaying market trends, momentum, volatility, and potential future price movements.

For example, a technical indicator can show traders where to place a stop-loss order when it comes time to close a trade, or if an asset is trending upwards or downwards.

Popular Technical Indicators Used in Cryptocurrency Analysis

Technical indicators can be broadly categorized into four types:

• Trend Following Indicators
  Trend-following indicators help traders identify the direction of a trend. Examples include moving averages, Moving Average Convergence Divergence (MACD), and On Balance Volume.
• Oscillators
  Oscillators, on the other hand, help traders identify overbought or oversold conditions within a range-bound market. Examples include the RSI (Relative Strength Indicator), and Bollinger Bands.
• Volume indicators
  Volume indicators measure the amount of trading activity in a given period of time. An example of a volume indicator is the on-balance volume (OBV).
• Volatility indicators
  Volatility indicators measure the degree of price fluctuations in a given period of time. The Bollinger bands (BB) fit in the volatility indicators category.

Let's delve deeper into some widely used technical indicators in the cryptocurrency trading world:

Moving Average Convergence Divergence (MACD)

MACD indicator offers clues on both a trend and momentum (the tendency for rising asset prices to increase and falling prices to keep going down.)

Traders often use MACD crossovers to signal potential buy or sell opportunities.

For example, when the MACD is above 0, this indicates a bullish momentum, meaning that it’s an excellent time to buy. If the MACD is below 0, this reveals a bearish momentum, meaning that it’s a good time to sell.

Bollinger Bands

Bollinger Bands are used to analyze the price and volatility of a crypto asset over time. Bollinger Bands consist of a middle band that represents the moving average (SMA) and two outer bands that represent volatility: an upper band (shows high volatility) and a lower band (shows low volatility).

Relative Strength Index (RSI)

Traders rely on the RSI to estimate market momentum. Using a formula, the RSI determines whether a crypto asset is overbought or undervalued. The RSI compares an asset’s strength on days when prices go up with its strength on days when prices go down.

When the RSI goes above 70, this means assets are overbought, whereas numbers below 30 indicate assets are oversold.

Moving Averages (MA)

The MA is a lagging indicator that helps predict trends based on price movements from prior days.

Moving averages smooth out the price action, which means traders can filter and take into account the price for crypto assets for usually a set time period: 50, 100, or 200 days.

There are two types of moving averages: simple and exponential.

Average True Range

ATR shows investors the average range prices swing for an investment over a specified period, focusing on recent price movements.

Traders use this indicator to measure market volatility. Higher ATR values indicate higher volatility, while lower values suggest lower volatility.

Average Directional Index (ADX)

ADX helps traders and investors identify whether a market is trending or ranging, determining the best entry and exit points for trading crypto.

The indicator displays a single value usually ranging from 0 to 100, with higher values indicating stronger trends.

The ADX doesn’t tell traders whether the trend is bullish or bearish, only how strong it is, so they can avoid trading against the trend.

The On-Balance Volume (OBV)

The OBV indicator is a technical analysis tool that measures the volume of trading activity in relation to the price movement of an asset. OBV’s core mechanics rely on checking the volume, taking it as the strongest indicator of how the crypto markets work.

The On-Balance Volume can also help traders evaluate the liquidity of a cryptocurrency. Higher OBV values often show higher liquidity, making entering and exiting positions easier without significant price slippage.

Commodity Channel Index (CCI)

Traders use CCI to recognize overbought and oversold conditions and potential trend reversals. The indicator measures the deviation of the typical price from its simple moving average (SMA) over a specified number of periods.

The CCI is considered to be in a positive trend when it is above zero, and in a negative trend when it is below zero. The CCI can also be used to determine when a crypto is overbought or oversold, by using a threshold value such as 100 or -100.

How to Use Technical Indicators With Altrady

Once you’ve set up an Altrady account, familiarize yourself with the dashboard.

Go to the ‘Trading Terminal’ menu. This will show you an overview chart of the cryptocurrencies markets, based on the data you set or chose when making the account.

From the ‘Indicators’ tag, you can choose a technical indicator.

Select an Image

The indicator will be listed below the chart.

Conclusion

Technical indicators are valuable tools for cryptocurrency traders looking to make informed decisions. You can confidently navigate the crypto market by understanding how these indicators work and integrating them into your trading strategy.

Remember that no single indicator will indicate a market reversal or confirm a market trend. The best strategy is to use a combination of indicators or, better, personalize your technical analysis using the tools and indicators that better fit your trading style.