Trend indicators are crucial in establishing the ideal trading strategy to use at a time. Nevertheless, when choosing the indicator to use, it is essential to go for a combination instead of depending on just one to get a complete picture. Another vital point to remember is to avoid being redundant in picking your indicators. Most traders make the mistake of using indicators that give the same information.
This article digs deep into the primary technical indicators you can use in day and swing trading.
The Common Trend Indicators
Bollinger bands comprise three lines: the lower, middle, and upper lines. The middle line represents a simple moving average of a cryptocurrency’s price, and an upper and lower band drawn two standard deviations away. The more the price moves to the upper band, the more overbought the market. On the other hand, the closer the price draws to the lower band, the more oversold the market.
Since standard deviation is a measure of volatility, the upper and lower bands form a squeeze, indicating low volatility. This is an excellent time to enter the market because it signals imminent volatility and a potential trading opportunity.
On the contrary, the wider the bands, the higher the probability of a decrease in volatility and the possibility of exiting the trade. But Bollinger bands do not show when a change will occur or the direction of a price move. Therefore, you should use them in combination with other non-correlated indicators like the moving average divergence/convergence (MACD).
This image is sourced from this site.
Moving averages determine the average of a market’s price movement in a certain period, smoothening out any unpredictable short term spikes. It is classified as a lagging indicator because you calculate it based on previous price movements. As such, it confirms trends rather than predicting them.
There are two primary moving averages you can leverage in your trading strategies; the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). The SMA assumes a straight average over a given period and spreads equal force to every data point. On the other hand, the EMA significantly considers the most recent data points and takes them as more relevant. By considering current information more significantly, the EMA gives more precise trend signals than the SMA. However, it also raises the likelihood of a false call. Therefore, it is advisable to use both of them.
Sourced from IG.
The Moving Average Convergence Divergence (MACD) relies on moving averages to establish trend directions and reversals. It comprises a MCF line, a signal line, and a histogram showing the difference between them.
You calculate a MACD line by establishing the difference between the two moving averages, mostly a short term moving average. You get to buy and sell signals when the MACD and the signal lines cross each other. A bullish trend is imminent when the MACD line crosses above the signal line, which is the right time to enter a trade. When the MACD line crosses below the signal line, there is a high possibility of a bearish trend.
Sourced from babypips.
Relative Strength Index
You can use a Relative Strength Index (RSI) to measure the speed and change of price moves. You calculate it by comparing the current price strength relative to the previous strength. For instance, a 14 period RSI will compare today’s price to the last 13 closes. A high reading shows that the current price is strong relative to the past 13 closes, and vice versa. Below is the formula for calculating the RSI:
RSI = 100 – ((100/ (1+ (Average of Upward Price Change/Average of Downward Price Change)).
RSI ranges from 0 to 100. A digital currency is considered to be overbought when its RSI is 70+ and oversold when less than 30. However, you can adjust these standard levels to fit your strategy better. During strong trends, RSI may remain in overbought or oversold levels for prolonged periods.
Image sourced from Fidelity.
Tokenizer Blockchain Banking Platform
Tokenizer is a blockchain investment banking system that champions accessible, transparent, and safe financial services. We believe that everyone deserves equal access to investment and fundraising opportunities. That is why we are democratizing access to capital for investors and fundraisers by making investing and fundraising efficient, safe, and accessible to everyone.
Are you in need of raising funds or investing in security tokens? Apply to raise funds through Tokenizer by filling this application form. If you want to invest in security tokens, sign up for a Tokenizer Investment Account today, and if you want to liquidate and trade-in Asset-Backed Tokens, we have a decentralized exchange designed for you! You can also contact us to order a metallic crypto card at $149 only.
Follow us on social media