Note: this article has been written for beginner traders. Second note: there is always risk associated with any method, no method of trading is completely risk-free. Before starting to trade with real money, we recommend stimulated trading, also called “paper trading”.
What are indicators in trading?
Indicators supply statistical information used by traders (professional and amateur). They are used to understand the current market situation, and are often used for predicting future progressions as well.
In the Forex and cryptocurrency markets you will find that there are many indicators people like to use, however in this article we will focus on some of the most used indicators.
Which ones are the most popular?
The moving average of the price averages the price per certain duration into a single line. It is one of the most basic indicators and is generally good at portraying the directional trend of price evolution. Different time frames will give different results. In the example below, the blue line is the moving average.
Without a doubt one of the most popular indicators. MACD stands for Moving Average Convergence Divergence. The person who came up with the idea is Gerard Appel. It is useful in all time frames, but as any indicator, the larger time frames work better. It is a delayed indicator that captures the momentum of the the price movement.
It is also useful in registering the changes in momentum. It uses two moving average lines: it compares the quickly exponential moving average to the slower moving one to show changes in market sentiment. The difference between the two lines can convey a lot of useful information.
RSI stands for “Relative Strength Index” and gives an indication of the trading situation of a given market is within its time frame, either overbought or oversold. Generally speaking, once the 70 barrier is passed, things might start indicating the market is overbought, for example. The higher the RSI and the higher the time frame it is used in, the bigger the probability of the market price going down, as it has just had a period in time in which many people have been buying it, making the entry point statistically less profitable and more high risk.
Another highly popular trading indicator is “Bollinger Bands”. They indicate volatility. Bollinger bands are made of the same moving average line shown twice, one above and one below the moving average line in the middle. The moving average line is based on the market price within the last 20 days.
One can say Bollinger Bands act as dynamic support and resistance levels, as touching one end of the band might often indicate a reversal. For example, if the price is touching the top line of the bands for example, it might indicate an overbought market, and vice versa would mean it might be underbought.
ADX stands for “Average Directonal Index” and is used as an indicator of current market trends. Made by J. Welles Wilder, it is maded to show how strongly the price is trending. Some say it is the best trend indicator out there. As with all other indicators, a bigger time frame is recommended when using it.