Indicators: a quick-start guide for long-term profits
Cryptocurrencies have introduced many new people to the world of trading, especially millennials. A recent survey confirms the current generation are significantly more likely to invest in crypto, compared to Generation X or Baby Boomers. [1] This is easy to understand, as millennials grew up with the internet and cryptocurrencies are native digital assets. Entering the crypto world is also quite simple, you just need a bank account or credit card and you can acquire your first share of Bitcoins through a very user-friendly exchange. But do millennials really know about trading? Do they have any experience in it? As a young generation, with little interest in traditional markets, it is very likely that they don’t. [2]
If you are one of these traders who lack previous knowledge about tools such as technical analysis, it is likely that you ask yourself questions such as, “should I buy this coin now, even though it already went 10% up today?”, “should I sell now, even though it’s 20% down, or wait and hope for it to recover?”, “do I take profits or hold?”. Without a proper grasp of what signals to look for, the only way to answer these questions would be to go with your gut, but can you be sure it is a reliable source?
Indicators are not magic, they will not instantly make you generate profit, but they will help you make smarter decisions.
In this blog post, we will introduce you to technical indicators, some of the most used tools in trading. If you are not already familiar with them, a well-rounded knowledge of these key tools will help you take a step forward and improve the way you trade and, consequently, improve your profits.
What are technical indicators?
Technical indicators are mathematical calculations that use historical data about the price and volume of an asset to predict its future price direction. These indicators process the data and suggest buy or sell signals, indicate overbought or oversold conditions in an asset’s price and give information about trends: whether the asset is in uptrend or downtrend and how strong it is. Some of them are shown within the price chart, while others are shown in a separate graph below the chart. In the following paragraphs we will show you the four categories of indicators, together with an example that will allow you to understand how easy is to use them and how much it could help your trading strategy.
Oscillators
Oscillators are technical indicators that vary between set levels, or above/below a center line, to indicate if an asset is in overbought or oversold conditions. Oscillators are commonly used in combination with other indicators such as trend indicators, as they are especially useful when the price chart is non-trending. Let’s now take a closer look at the Relative Strength Index (RSI), one of the most used oscillators:
RSI is a momentum indicator that measures the speed and magnitude of the recent price changes of an asset to determine if it has been overbought or oversold. It shows values between 0 and 100, with 0 being the highest oversold condition and 100 the highest overbought condition. As the most common interpretation, if RSI shows values over 70, it suggests the asset is overbought, while values under 30 suggest oversold conditions. It is worth mentioning that some traders go by different values, depending on the asset.
Divergences also reflect bullish or bearish conditions: we can consider it bearish if the asset’s price increases more than the RSI (e.g. reaching a new high while the indicator doesn’t), while it would be bullish to see the asset’s price decreasing more than the RSI does.
Trend Analysis
Trend Analysis indicators are represented by a line which fluctuates in the same graph as the price. They measure the direction and strength of an asset’s trend, providing valuable information to the trader about whether there are bullish or bearish conditions. The most-used Trend Analysis indicators are called Moving Averages. Have a look at Exponential Moving Average (EMA), one of the most used Trend Analysis indicators:
EMA is a moving average indicator which measures the trend direction over a period of time. It gives more importance to recent price data than other moving averages like Simple Moving Average (SMA). It is shown as a line which appears within the price graph, moving close to the price and eventually intersecting with it. EMA moving above Price indicates a downtrend while EMA moving below Price indicates an uptrend. It can also act as a level of Support or Resistance in uptrends and downtrends, respectively.
We can get buy/sell signals using 2 different EMA lines (one with a shorter period than the other). If the shorter EMA (e.g. 20 days EMA) crosses above the longer SMA (e.g. 50 days), it is a buy signal. The opposite, where a shorter EMA crossing below longer EMA, indicates a sell signal. Another interpretation arises when intersecting with the price. The shorter EMA crossing the price from the bottom up, while remaining above the longer EMA, is considered a buy signal in the same way a shorter EMA crossing the price from top to bottom, while the longer EMA sits above the shorter EMA, means a sell signal.
Volatility
Volatility indicators will objectively help you measure the volatility of an asset’s price action. In the form of bands within the price chart, or showing as a single line below price, they give information about the strength of breakouts and trends. Bollinger Bands are one of the most popular volatility indicators, so let’s take a closer look at them.
Bollinger Bands are an indicator used to show upper and lower limits of potential price movements. They are shown overlaying the price chart, in the shape of two bands with a central line (a Simple Moving Average) separating them. Based on standard deviation, the spacing of the bands widens as markets become more volatile, then becomes narrower as prices stabilize.
The closer the price moves to the upper band, the more overbought the market is, while the closer the price moves to the lower band, the more oversold conditions are presented. There is a buy signal when the price rises above the upper band, and a sell signal when it crosses below the lower band.
Volume
Volume indicators use the total amount of money traded on an asset in their formula. Money can be expressed in any kind of currency, but the most commonly used is dollars or Bitcoin in cryptocurrencies. Volume indicators are commonly used to identify the strength of price movements. You probably know the basic volume indicator, which is commonly used together with the price chart, but let’s have a look into more advanced volume indicators such as Money Flow Index (MFI):
MFI measures the inflow and outflow of money into an asset to identify overbought or oversold conditions. It shows values between 0 and 100. In the most common interpretation, if MFI is over 80, it suggests that the asset is overbought, while values under 20 suggest oversold conditions. As we learnt with the RSI indicator, divergences also reflect bullish or bearish conditions.
These are just four examples of indicators that can help you trade smarter from day one. Commonly, traders use more than one indicator for their strategies, as they can be easily combined, adding more consistency to interpretations.
In the upcoming update, Signals v2, many other exciting features will be added, such as the ability to work with multi-asset strategies or supporting any kind of data streams (even for sentimental analysis), and we will include over thirty different technical indicators together with a Knowledge Base where we will explain in simple terms what they are and how to use them. As we keep working on the development of one of the most advanced algorithmic trading platforms, we are also investing in educating the trading community to bring smarter trading to everyone. Signals Network will act as an ecosystem where data scientists, developers, and traders will share their knowledge and monetize their skills, united under the same goal: beat the market!
[1] Brown, Mike (2018). 10 Ways to Invest $10,000 | What Investment Opportunities Interest Each Generation?. Available at: https://lendedu.com/blog/10-ways-to-invest-10000/
[2] Barnett, Chance (2016). How Millennials Will Change The Face Of Finance & Investing. Available at: https://www.forbes.com/sites/chancebarnett/2016/09/14/how-millennials-will-change-the-face-of-finance-investing/#3ae41bdac4a9
