In technical analysis, a technical indicator is a mathematical calculation based on historic price, volume, or (in the case of futures contracts) open interest information that aims to forecast financial market direction.Technical indicators are a fundamental part of technical analysis and are typically plotted as a chart pattern to try to predict the market trend.Indicators generally overlay on price chart data to indicate where the price is going, or whether the price is in an “overbought” condition or an “oversold” condition.- Wikipedia
Parabolic Stop and Reverse (SAR)
Time to move on to something a little simpler, Parabolic SAR. This is a trend indicator. Dots are placed on the chart above or below the price, and they indicate the potential direction of the price movement.
How can such a simple indicator be used in trading? Well, I’ll tell you. When the dots are above the price, the market is in downtrend, indicating that you should be short.
When the dots are below the price, the market is in an uptrend, indicating that you should be long.
One thing to be aware of. Do not use Parabolic SAR in a ranging market, when the price is moving sideways. There’ll be a lot of noise and the dots will flip from side-to-side giving you no clear signal.
Next in line, the stochastic indicator. This is a momentum indicator, and can be used to find where a trend might be ending. In a similar fashion to RSI, it’s used to determine when an asset is overbought or oversold.
It’s made up of 2 lines plotted on a separate chart.
As you might’ve already guessed, stochastic can help you to pick an entry point and get into a trend at the very beginning. When the stochastic lines are above 80, the market is overbought, and a DOWNTREND is likely to follow.
Now when the stochastic lines are below 20, it indicates that the market is oversold, and an UPTREND is likely to follow.
The same caveats as RSI apply here. When trying to get into trends early, there will be many fakeouts, so you should be prepared with stop losses in case the market doesn’t go your way.
As always, use the indicator to give you an idea of where the market is likely to go. Don’t bet your house on it though. Good risk management prevails.
Average Directional Index (ADX)
Here’s another oscillator, but this time it’s a trend indicator. Average Directional Index (ADX) values range from 0 to 100, and is intended to give you a signal of trend strength.
If ADX is below 20, the trend is weak. If it’s above 50, the trend is strong. Bear in mind though, that ADX doesn’t tell you the direction of the trend, just the strength.
When trading, you can use ADX to avoid fakeouts. It’s really best used in combination with other indicators, as (despite the name) it doesn’t give you any information about trend direction.
Combined with a directional trend indicator, such as Parabolic SAR, ADX can confirm that a trend is strong and is going to continue. This should give you more confidence when entering into a position.
ADX can also help you to exit the trade when the trend weakens, to avoid getting caught by price retracements.
As with many trend indicators, ADX lags behind the price, so is not useful if you want to get in on trends early. But it is useful if you only want to trade strong trends.
Those are 7 popular indicators that you’ll see around. Create your own charts, play around with the indicators and get a feel for how they work.
Be aware, the default parameters for the indicators might be the best for cryptocurrencies, or for your trading style, so change them. See how the parameters affect the signals you get from the indicators, and whether this gives you better entries, or helps you to catch better trends.