TA for Newbs; Technical Indicators

??Time for another TOTAL NOOB?#TA ?LESSON??

Today I want to talk about “technical indicators” Indicators are essentially mathematical formulas that average prices over a period of time in various ways. That data is then overlaid onto your chart as a visual.

Lemme ‘splain.

The idea behind most technical indicators is, if you take an average of previous prices you’ll end up with a smoothed out line that tells you the direction of the trend. It’s much more stable than sporadic and volatile price candles.

For example, the Simple Moving Average (SMA) is an average of closing prices over a period (that you determine is relevant). Here (in yellow) we see a 20 period SMA (takes the closing price of the last 20 candles and averages them).

For a moving average, there are two factors in the calculation. The period of time you choose and the timeframe of the candles. The above example was set to 15min timeframes, so those are 15min candles. Obviously results will change when the timeframe changes.

Another popular indicator is the Exponential Moving Average (EMA). It is similar to the SMA but recent prices are more weighted in the average.

How is this helpful? MAs can make it easier to see trends at a glance. There are also many trading strategies that revolve around signals when price closes above or below an moving average The larger the gap between recent price and the MA, the stronger the trend.

One of my favorite uses of MAs is cross-over signals. When the avg of one period crosses over the avg of another. For example, when the 50 period MA crosses above the 200 period MA, this typically signals an upward trend. The opposite is also true.

There are also many “standard” or best practice MA periods (50/200, 20/50, 12/26). What’s interesting about these, since traders have been using them as signals for decades, they tend to become self-fulfilling prophecies. So, they continue to be reliable signals.

Next we have Retracement Levels. Notice that price action rarely (if ever) moves in a straight line sideways. It’s always bouncing up and down. Any trending move will have a “retracement” where the price bounces back a little bit.

There are also mathematical equations that have determined the most common percentage ratios of retracement over hundreds of years of asset trading. One of the most popular is the Fibonacci retracement.

The purpose of outlining these is to give the most probable support and resistance ranges where price may hover or bounce. This is valuable as it will allow better entries or exits into and out of the market.

Next we have momentum indicators. These are indicators that essentially alert traders to the direction of momentum. They are typically used to determine when a trend reversal may be near.

One popular momentum indicator is the Stochastic Oscillator. The stochastic is a range where when the lines are above 80 the asset is considered “over bought” and when the lines are below 20 the asset is “over sold.”

This in itself is not a signal to get out of your position because?#cryptos ?can be over bought or over sold for long periods of time. It’s mostly an indication that the trend is strong. But, when the lines start to move in the other direction, a reversal could be coming.

Another momentum indicator is the Rate of Change, where you can use divergences to help predict future price movement. Here we see a lower green candle caused a higher spike into over-bought territory. This was a divergence before a big drop.

There are MANY more indicators, with formulas ranging from simple to absurdly complex. When you use multiple indicators at once, this allows you to have “confluence.” Confluence is when more than one signal confirms potential price action.

You don’t want to use too many indicators. You’ll never get a clear signal that way. My advice is to only use two. My favorite is MA crossover with momentum indicator confluence. (and use retracement levels as entry points and profit targets).

You’ll never use ALL of the indicators available, and that isn’t the point anyway. The point of these indicators is to give you several tools from which you should choose the ones that fit your style of chart reading the best.

Use indicators that help you see the patterns you should be seeing in the price action you are tracking. That is how you make good entry and exit decisions. And of course, don’t forget risk management.

If you found this helpful, share it with a friend or five. ???? Cheers to your success!?#WAGMI