Price chart pattern analysis is one of the most loved aspects of technical trading, however, there is one technique that is often overlooked by beginners, namely indicators. These off-chart projections are used to signal important information that couldn’t be seen from price charts otherwise, and so they can prove useful for predicting price movements before they happen. In this article, we’ll explore the major indicators and explain all you need to know about them.
Technical indicators belong to the family of advanced trading tools, however, this does not mean that beginners can’t benefit from them. Generally speaking, technical indicators are kinds of predefined calculations that project a certain graphical representation based on various metric inputs, such as volume, price change over time, or average price. This means that while one indicator might only take volume into account when drawing its graph, another could solely focus on the average price of a crypto asset over time.
In any case, there are two main types of technical indicators, that are, overlays and oscillators. As such, we’ll focus on these two classes in this article.
Overlays are on-chart indicators, meaning that they are displayed in the same grid as the price chart. There are hundreds of overlays out there, but the most popular ones are undoubtedly moving averages and Fibonacci lines.
A moving average (MA) is a popular technical indicator that, as its name foreshadows, calculates and projects the average of certain price data. A moving average could be used to indicate a trend of a crypto asset more accurately than a simple price pattern analysis would, but an MA can also come in handy when determining real support and resistance levels. There are countless moving averages out there, such as the 200-day MA, and the 30-day MA.
Fibonacci lines, or retracement levels, are technical indicators that use Fibonacci numbers to try and predict when a price action reversal is approaching. This is simpler than it sounds, so let’s take a look at an example to illustrate. Popular Fibonacci numbers are 23.6%, 38.2%, 50%, 61.8%, and 78.6% which, in the context of a Fibonacci retracement level, means that if a price drops to a level that is a Fibonacci percentage of the original price, it could experience a bounce back. This is a widely used technique, however, its accuracy when applied alone is questionable.
Contrary to overlays, oscillators are indicators that are formed off-chart using their own, unique grids. Oscillators are more advanced tools than overlays, which means beginners might have a harder time applying them in practice. Widely adopted oscillators include the Relative Strength Index (RSI), stochastic oscillator, and MACD (Moving Average Convergence Divergence). Since these are highly complex tools, their explanation is out of the scope of this article, and will be discussed separately.
Overall, technical indicators can prove to be useful during technical analysis. When used correctly, these tools can help improve traders’ accuracy, as well as support existing hypotheses established through price chart pattern analysis.
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