The professional trader uses the best tools to monitor market changes. Technical analysis indicators will facilitate this process.
Billionaire Warren Buffett once famously said, “In the business world, the view in the rearview mirror is always clearer than the view through the windshield.” Its meaning is that it is easier to look back and analyze what happened than to look ahead and try to see the future.
But the task of a professional trader is to accurately predict how the market situation will change, because it is the correct forecast that can bring profit. To make your stock, currency or cryptocurrency trading efficient, it is important to use best technical analysis indicators… Surprisingly, markets can be so different and forecasting methods remain equally effective for them.
How technical analysis indicators work
Trading indicators are actively used by professional traders in financial markets, including for cryptocurrencies. These tools work well with popular strategies and analytics to provide additional data and help create a clearer picture of the market.
The main purpose of the indicators – generate trading signals that allow you to open a position to sell or buy an asset at the right time.
Since the principle of operation of technical analysis of the financial market and indicators is based on the study of price behavior in the past, you can never be completely sure of the correctness of the forecast.
Experienced traders usually use two or three indicators in their work to confirm signals, which is called a trading strategy. It is allowed to use more, but in this case the noise increases. In addition, it is difficult to choose the settings for a large group of indicators for one market situation and chart period, so many strategies are focused only on one or two indicators and certain settings.
It is important to understand that technical analysis indicators will not help you “look into the future” with 100% certainty. They allow you to see the main trends at the moment, assess their direction and strength. This helps to make the right decision in time.
The main groups of trend indicators of technical analysis
Currently, a large number of different indicators are available to the cryptocurrency trader, which came to this new market from traditional financial ones. For convenience, they are divided into four main groups.
List of main indicators of technical analysis
Of course, each trader chooses those indicators that are most convenient for him to work with. We will tell you about the most popular and effective options.
Volume indicators: OBV
OBV – one from the most popular representatives of this group of technical indicators. This tool shows the dynamics of changes in the price of an asset, informing about the number of trading operations for the selected period. If volumes have seriously dropped or increased, and the market continues to stand still, a powerful trend should be expected.
OBV also shows in which direction the balance begins to shift – buyers or sellers. This indicator is used primarily for trend confirmation. If the OBV values correspond to market highs, it means that the uptrend is strong enough. If the lows are confirmed, then the downtrend prevails.
Accumulation / Distribution Indicator (AD)
This tool was developed based on the OBV indicator and the Accumulation / Distribution Index. It shows whether the current trend in cryptocurrency quotes has sufficient support from the players. The indicator also generates quite strong divergence signals. Thus, the trader receives a message about the imminent trend change.
If AD rises simultaneously with the price chart, it is worth buying an UP option. When both curves decrease together, a DOWN option is acquired. If the price rises and the indicator falls, then the uptrend is nearing completion. At this point, it is worth buying a cryptocurrency with a decline forecast. If the situation is mirrored, a virtual coin with a growth forecast is bought.
The disadvantage is that the indicator ignores price gaps, which leads to errors in calculations. In addition, it follows price movements too closely, which can lead to the omission of some discrepancies. Otherwise, it is a very effective auxiliary analysis tool.
Cash flow index or MFI
This index shows how much money investors invest in cryptocurrencies, securities or other assets, or how quickly they withdraw them. A positive cash flow leads to an increase in prices, a negative one – to a fall. Evaluating flows allows you to determine the strength and direction of the future trend. MFI Cash Flow is calculated as the product of the average high, low and close prices by the trading volume for the period. The index itself is the quotient of the sum of positive and negative flows. For convenience, the index can take values from 0 to 100.
The index shows divergence as well as overbought and oversold zones. The investor makes decisions based on overbought levels. If the price exceeds the upper level, then the market has a positive cash flow and you need to buy. If the price drops below the lower level, the opposite is true.
Moving Average Index
One of main indicators of technical analysis for today is the moving average. When prices fluctuate up or down, their movement can be misinterpreted as a reversal or continuation of the trend. The MA (Moving Average) indicator calculates the average price over time and also recalculates it over time.
Short periods have little effect on the Moving Average indicator as it uses long time frames. By looking at the moving average chart, you can identify support and resistance levels.
Support is a lower “barrier” that the price will most likely not jump over. The resistance level is the opposite of the support level – this is also in a sense a barrier that is above the current price level, and it is unlikely that it will be possible to overcome it with confidence.
Thus, the MA indicator makes it easy to see the support and resistance levels for Bitcoin and other altcoins.
Another popular trading indicator is the Bollinger Bands. This instrument is based on a Simple Moving Average (SMA). Two identical SMAs, shifted by the standard deviation, are located above and below, forming a channel, within which the price moves most of the time. The narrowing of the channel indicates a decrease in the volatility of the asset, the expansion – of the growth.
Breakout trading means opening deals at the moment when the price crosses one of the boundaries. If the upper value is exceeded, a sell deal is opened, if the lower value, then a cryptocurrency buy deal. Breakdowns can occur quite frequently. Therefore, you should only react to signals if the price crossed the border, moving from the opposite or at least the center line.
Remember that effective trading in the cryptocurrency market, as well as in other financial markets, is impossible without a professional approach. Even the most advanced indicators cannot make the right decision for you. Only experience, the ability to analyze the market and an understanding of its dynamics will help you become a real professional trader and make good profits.