Technical Indicators 2. - Crypto Academy / S4W4- Homework Post for @reminiscence01

Hello great Steemian,
It's yet another privilege to learn and earn. I am really impressed with the amount of knowledge I have gathered since I joined this wonderful community. I am grateful. I have completed my home work task and here I present it to our amiable lecturer and all those who may have opportunity to read it.

Homework Task

QUESTION 1
a) Explain Leading and Lagging indicators in detail. Also, give examples of each of them.
b) With relevant screenshots from your chart, give a technical explanation of the market reaction on any of the examples given in question 1a. Do this for both leading and lagging indicators.

QUESTION 2
a) What are the factors to consider when using an indicator?
b) Explain confluence in cryptocurrency trading. Pick a cryptocurrency pair of your choice and analyze the crypto pair using a confluence of any technical indicator and other technical analysis tools. (Screenshot of your chart is required ).

QUESTION 3
a) Explain how you can filter false signals from an indicator.
b) Explain your understanding of divergences and how they can help in making a good trading decision.
c) Using relevant screenshots and an indicator of your choice, explain bullish and bearish divergences on any cryptocurrency pair.

QUESTION 1a)

Explain Leading and Lagging indicators in detail. Also, give examples of each of them.

Leading indicators:

his is the type of indicators used in cryptocurrency trading to predict price movement of assets in the market before the price begins to follow that particular trend. Leading indicators are forward-looking indicators. They give information on where the price of crptocurrency could be moving next. They help traders get the likely price movement of crpto asset so that they can enter the market early enough. Leading indicators forecast the price region at which an asset would be overbought or oversold, and we are aware that if such happens that there is a possibility that the trend will reverse and another new trend is expected to form. While this is true, it is important to remember that sometimes price can stay in an overbought or oversold regions for some time before it can start reversing.

Leading indicators provide important information to traders on the tendency for prices of crpto assets to move in a particular direction over a period of time. It is important to note however, that these indicators are not perfect and always accurate, because they only give information of the likely price movement and not that the price will definitely move in a particular direction. So, the best way to use these indicators is to combine them with the insight from the Lagging indicators and other technical analysis. It is advisable to use them as a guide for your trading strategy and not to completely rely only on them to make trading decision.

Examples of leading indicators are: Awesome Oscillator, On Balance Volume (OBV), stochastic oscillator, Fibonacci Retracements, Pivot Points, Relative Vigor Index (RVI).

Lagging indicators:

This type of indicators give traders information about what has already happened in the previous cryptocurrency market. Lagging indicators are backward-looking indicators. They always move or lag behind the price and do not provide feedback to the traders on time so that they can take early trading action. The information they provide are always late and the insights they give are always too late to act on. Lagging indicators only provide information based on past trading history and do not give information on the next price movement.

Not withstanding, Lagging indicators are very important and useful indicators for cryptocurrency trading because, they help traders to understand the price action of crypto assets and to provide traders with information about what has already happened in the previous market. These help traders gain insight on the next price movement.

Examples of lagging indicators are: simple moving average (SMA), Bollinger Bands​​, stochastic oscillator, Relative Strength Index (RSI)

QUESTION 1b)

With relevant screenshots from your chart, give a technical explanation of the market reaction on any of the examples given in question 1a. Do this for both leading and lagging indicators.

leading Indicator

Below is the screenshot of my Leading indicators chart explaining cryptocurrency market reaction. I am using ADA/USDT cryptocurrency pair with stochastic oscillator.

From the above chart, you will notice that the crypto price had been going up trend, and when you look at the indicator you will see that it is going downward. What is actually happening is that the indicator is giving signal predicting that the price is at the overbought point and that there is going to be a bearish reversal. If you observe, the price has not started coming down. This is to show that the indicator is predicting the price movement of assets in the market before the price begins to follow that particular trend.

Lagging Indicator

The screenshot below is my Lagging indicator chart explaining cryptocurrency market reaction. I am using Parabolic SAR for ADA/USDT cryptocurrency pair.

In the above screenshot, you will notice that when the price movement reached Higher Highs at a reversal point and started going downward trend that the indicator did not appear immediately. The same thing happened when the price movement reached lower lows. It took some time before it appeared. What it means is that the price has moved to some extent before the points appeared. Lagging indicators lag behind the price. Market price always moves to a certain extent before they give out signal.

QUESTION 2a)

What are the factors to consider when using an indicator?

Cryptocurrency trading is a very good and a risky business. That is why traders are often warned not to jump into the market and begin to buy and sell assets. Technical indicators are introduced to help traders technically analyse market trend before venturing into it, to avoid loses. It is also not advisable to just choose an indication and start using it to trade without first of all considering some basic factors that can help you select indicator that will give best result. Before choosing indicator(s) for your trading, these are the factors you should consider:

Good Understanding your Trading Strategy
Good and effective traders have organised plan of action designed to achieve great success in their cryptocurrency business. They understand the strategy they want to employ in their cryptocurrency trading and their choice of technical indicator is largely determined by this strategy. For you to successfully use technical indicators to make a good trading decision, you must as a matter of necessity try to understand your trading strategy and let it guide you to select the best indicator(s) that match your trading style.

Good Knowledge of Market Trend

Before choosing a technical indicator, it is very important that you have good understanding of the market situation. You need to know the state of the market, whether the is market trending up, trending down or ranging. Proper understanding of the state of the market will help you select the best technical indicator(s) to use. For example, when market is trending a trader is expected to choose market trending indicators and momentum-based indicators when the market is ranging.

Good Knowledge of various types of Indicators

To make the best use of technical indicators, it is important to understand that they are of different types and that they are to be used in different market situation where they are needed. Before selecting your technical indicator(s), you should consider the type of technical indicator(s) that will suit the market trend. For example, if you want to predict price movement of assets in the market before the price begins to follow that particular trend, you should select Leading indicators and if you want to understand the price action of crypto assets or acquire information about what has already happened in the previous market, lagging indicators will go for that.

Good Knowledge of how to combine various types of Indicators

Before considering using an indicator, a trader should be able to know that he needs other technical analysis to confirm the signal he or she may get from one indicator. A trader is not expected to trust one indicator signal because he has so much knowledge about indicator and enter market. He should also consider having good knowledge of other forms of technical indicators so that he can combine them to confirm if the signal information he is getting is the same thing with the other indicators. This will ensure an effective use technical indicators which will lead to a good trading decision.

QUESTION 2b)

Explain confluence in cryptocurrency trading. Pick a cryptocurrency pair of your choice and analyze the crypto pair using a confluence of any technical indicator and other technical analysis tools. (Screenshot of your chart is required ).

Confluence in cryptocurrency trading refers to when a cryptocurrency trader combines more than one technical analysis to confirm the signal he gets from an indicator. It means a trader using different indicators to get the same information signal. In cryptocurrency trading for profit, we need to confirm the signal we get from indicator by combining them with several other technical indicators and when they show the same signal then the signal can be trusted and trading decision can be taken safely. I am using Moving Average and Relative Strength Index.

From the screen shot above, the market price was moving in an upward direction and when it got to the reversal point it crossed my Moving Average indicator's line and both of them started coming downward. Now look at my RSI, you will observe that at that same point that it has also reached a reversal point and it begins to come down. This is a confirmation that the signal is correct and traders can enter the market. This concept is exactly what we call confluence in cryptocurrency trading.

QUESTION 3a)

Explain how you can filter false signals from an indicator.

The knowledge of how to filter false signals from an indicator is very vital, this is because indicators can give fake signals and mislead a trader. One of the best ways that traders can filter false signals from an indicator is by close monitoring of price movement and market response towards the price action. When indicator releases the false signal, the market is supposed to react towards the signal accordingly. If the market reacts differently, in an opposite direction, then a trader should know that the signal is fake.

QUESTION 3b)

Explain your understanding of divergences and how they can help in making a good trading decision.

According to my understanding, Divergence is a situation when the price of crypto asset is not moving in the same direction with technical indicator. When the price of an asset is moving up and the technical indicator line is moving down, in the opposite direction. Divergence can help traders in making a good trading decision when they carefully observe price movement. For instance, if price movement shows a higher highs formation and indicator shows a lower low formation, a careful observation will inform a trader that the price movement has reached potential reversal zone and there is high probability of price reversal. An experience trader should at this point enter the market and place sell order.

However, Divergence can help traders in making a good trading decision because it can be used to detect false signal.

QUESTION 3c)

Using relevant screenshots and an indicator of your choice, explain bullish and bearish divergences on any cryptocurrency pair.

Bullish Divergence
From the screenshot below, I will be using Volume oscillator to explain bullish divergence on BTC/USD cryptocurrency pair.

From the chart above, you will notice a situation where the price is not moving in the same direction with the technical indicator. The price is moving downward while the technical indicator is moving upward. The price is on the bearish trend and the indicator is on the bullish trend.

Bearish Divergence
In this chart, I used Relative Volume Indicator on BTC/USD cryptocurrency pair.

According to the above chart, the bearish divergence occurred when the price moves towards the higher highs formation and my Relative Volume indicator moves towards the lower lows formation. This is just a direct opposite of Bullish Divergence.

Conclusion

The importance of Technical Indicators can not be overemphasized, they are very very necessary for cryptocurrency investors. Technical indicators help traders to easily spot the price action and to predict the market trend. I am very happy to be part of this class. I have learnt a lot about technical indicators and with the knowledge I acquired in this class, it will be easier for me to learn more and be a good trader in future.

I am very grateful to our lecturer, Prof. @reminiscence 01 for the good work. God bless you.

Thanks a million.

Note: All Screenshots are taken by me from tradingview.com.