If you've read our guide on technical vs fundamental analysis, you may be wondering how to begin conducting chart analysis of your own. In this guide, we will walk you through some of the best technical analysis indicators so that you can boost your trading strategy.
What is technical analysis?
Technical analysis is the process of using past market data to predict future price movements. Technical analysts believe that all relevant information is reflected in the price action and that price patterns repeat themselves over time.
Technical analysts use a variety of tools and indicators to find trading opportunities. In this guide, we will introduce you to some of the most popular technical indicators.
What are Technical Indicators?
Technical indicators are mathematical calculations based on past price, volume, or open interest data. Technical indicators can be used to spot trends, identify support and resistance levels, and make trading decisions.
There are hundreds of different technical indicators out there. Some are more popular than others. The most popular technical indicators are:
Moving averages can be used to spot trends and to smooth out price action. A moving average is simply the average price of a security over a certain period of time.
There are two types of moving averages:
Simple Moving Average (SMA): This is the most common type of moving average. It is calculated by taking the average of the past X periods.
Exponential Moving Average (EMA): This type of moving average gives more weight to recent prices. It is calculated by taking the exponential moving average of the past X periods.
The most popular time periods for moving averages are 50-period, 100-period, and 200-period SMAs.
Bollinger Bands are a technical indicator that is used to measure price volatility. Bollinger Bands are created by adding and subtracting a standard deviation from a moving average.
The Bollinger Band® indicator consists of three lines:
- The middle line is the simple moving average (SMA)
- The upper line is the SMA plus two standard deviations
- The lower line is the SMA minus two standard deviations
When the market is volatile, the Bollinger Bands® expand. When the market is not volatile, the Bollinger Bands® contract.
The most popular time periods for Bollinger Bands are 20-period and 2-standard deviation.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator that measures the speed and change of price movements. The RSI oscillates between 0 and 100.
The RSI is considered overbought when it is above 70 and oversold when it is below 30.
The most popular time periods for the RSI are 14-periods.
The Stochastic Oscillator is a momentum indicator that measures the position of the current close relative to the high/low range over a certain period of time. The Stochastic Oscillator ranges from 0 to 100.
The most popular time periods for the Stochastic Oscillator are 14-periods with 3 as the %D line.
The MACD (Moving Average Convergence Divergence) is a momentum indicator that measures the difference between two moving averages. The MACD consists of three lines:
- The MACD line: This is the difference between the 12-period EMA and the 26-period EMA.
- The signal line: This is a 9-period EMA of the MACD line.
- The histogram: This is the difference between the MACD line and the signal line.
The most popular time periods for the MACD are 12, 26, and 9.
These are just some of the most popular technical indicators out there. Technical analysis is a vast topic with many different indicators. These are just a few of the most popular technical indicators that you can use to find trading opportunities.
How to Use Technical Indicators: Best Practice
There is no one-size-fits-all approach to using technical indicators. Some traders use a single indicator, while others use a combination of several indicators. It all depends on your trading strategy and what you are trying to achieve.
That being said, there are some general rules that you can follow when using technical indicators.
1. Use indicators that complement each other.
For example, you could use a moving average to identify the overall trend and then use MACD to spot trading opportunities in the direction of the trend.
2. Use indicators that are based on different data sets.
For example, you could use RSI to identify overbought and oversold levels and then use Bollinger Bands to find trading opportunities.
3. Don't rely too heavily on any one indicator.
No indicator is perfect. They all have their strengths and weaknesses. It's important to use a combination of indicators so that you can get a more accurate picture of what's going on in the market.
4. Experiment with different settings.
Each technical indicator has its own set of parameters (e.g., the period for a moving average). These parameters can be tweaked to suit your needs. Experiment with different settings to see what works best for you.
5. Be patient.
Technical indicators are not magic tools that will always give you the perfect buy or sell signal. They are just tools that you can use to help you make better trading decisions.
Frequently asked questions
How do you trade using technical indicators?
There is no one-size-fits-all answer to this question. It depends on your trading strategy and what you are trying to achieve.
What are the best technical indicators for day trading?
There is no definitive answer to this question. It depends on your trading strategy and what you are trying to achieve. A good idea is to join a community, like that offered by SokuSwap and learn what works for other traders.
How many technical indicators should you use?
The number of technical indicators that you choose you to use will vary depending on your trading strategy. At first, it is best to focus on a few indicators and then add more as you become more familiar with Technical Analysis.
What are the 4 main types of indicator for technical analysis?
The four main types of indicators are trend, momentum, volatility, and volume.