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

Hello great steemians, greetings to you all from me, respective to the assignment given for the week4 of season4 period by professor @reminiscence01 on technical indicators 2, the continuation to the previous weeks assignment, I would be answering the questions given below.

_{image designed by me on canva}

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Question 1 (a)

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

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Leading indicators gives perceptiveness over market trends. This serves as an insight to traders and investors over the next market trend movement.

Leading indicators as the name implies gives a lead to market movement, showing/signaling the next market trend to traders before the actual movement commences. The leading indicators sends signal to traders/investors over the next market movement before its actual movement, that is, given room and opportunity to traders to commence trading either to an uptrend leading indication or to a downtrend leading indication which would increase the profit gain of the trader and also minimize the percentage rate of loss of the trader in the market.

In as much as the leading indicator serves as a foresight to traders in predicting the next market trend, it can also be vulnerable to fake signals and false trends. This can as much affect market strategy and can lead to loss of assets traded.

This is a good reason not to trust or use a single indicator tool for analysis, because of how volatile the market can be which is known as volatility in market trading. With the use of different other signals a trader can actually come to a certain decision with the fact that a consensus has been done and ready to commence trading, if not, any single indicator used can be affected by market volatility leading to false trend and resulting to loss of asset.

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• 1- Fibonacci retracements
• 2- Williams %R
• 3- Stochastic oscillator
• 4- the relative strength index(RSI)
• 5- On-balance volume (OBV)

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Lagging indicators are used in the confirmation of long-term trades, the show price movement of trades when it has already commenced the trend direction, which shows the slowness and lagging of the price trend.

Lagging indicators shows the current movement of prices, which goes in hand with the predicted movement of the leading indicator. The lagging indicator depicts signals by observing and following the current price movements and trends of the market closely, which notifies the trader of the different price point.

The lagging indicators are termed slow indicators in comparison to the leading indicator because of its late signaling by allowing the formation of price to Show it’s current/possible moves. This adds little profit to an investor/trader depending on the markets trend speed/rate and at the same time has increase in percentage risk Due to late entering of the market and also possible Retracement to another direction which could create loss.

In as much as the Lagging indicators follow current price movements trend, there are still possibility of the market to show or reveal false signaling which eventually would affect the traders. This could be as a result of other fundamental analysis which are affected by worlds economical values, political and governmental situations. The lagging indicator analysis results more positively and accurately for swing traders, traders who trade in a long-term bases.

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• 1- simple Moving Averages
• 2- Parabolic SAR
• 3-Bollinger bands
• 4- Ichimoku clouds
• 5-VWAP
• 6- MACD

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Question 1(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.

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1- LEADING INDICATOR

The stochastic oscillator is an important trading tool which is a technical indicator tool made up of two sides which are the resistance & support level. The stochastic oscillator serves as an indicator which depicts the overbought and oversold region of a market trade.

The stochastic oscillator was developed by a man named George Lane In late 1950s. This indicator shows the point of the current and present market price which is in relation to the range of price over time. Also note that the stochastic indicator is scaled from 0-100.

The illustration below is a graphical example of the stochastic indicator on BTC/TUSD chart

_{Screenshot from my trading view app}
Looking at the illustration above, you would notice and observer the Retracement of price movements from bullish to bearish, and this occurred immediately the stochastic indicator signaled the overbought rate of price which lead to the Retracement of price movement to a downtrend motion.

So, In comparison to my early definition of what stochastic technical indicator (stoch) is, we could see that change in price movement was due to the signaling of the overbought region in the stoch chart which lead to the Retracement of Market trend.

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2- LAGGING INDICATOR

Just like the other indicators, the parabolic sar Is a technical indicator which shows the current direction of an asset trend. This indicator determines The future price movement/trend of an asset But in a short time. The parabolic sar was invented by a famous technician by name J. Welles Wilder, Jr. The parabolic sar indicator gives signaling by following the current price trend of an asset which means it’s a slow signal but always in a short time.

So in other words this technical indicator and pattern of trading is for scalpers/short-time Traders.

Below is an example of parabolic sar indicator on BTC/TUSD chart.

_{Screenshot from my trading view app}
Following the illustration above, we see the parabolic sar depicted by dotted lines just close to the candlestick which shows the market price of an asset. The parabolic sar moves in line with the current market price of an asset.

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Question 2(a)

What are the factors to consider when using an indicator?

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There are factors in trading which are necessary to be considers before adventuring into trading and also before the use of any technical indicator. These factors need to be confirmed and met in other to carry out an efficient and proper trading which has a higher chance of profit making in the trading market. We have the following factors which are;

• 1- Understanding your trading strategy
• 2- observation & Understanding of market trend
• 3- Understanding the type of indicator
• 4- Determining trading confluence

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As a trader or an investor, the first and foremost factor to learn/adhere to is to understand your trading pattern. Under sting your trading pattern gives you a better opportunity in making profit from the market, this is due to the fact that a traders pattern of trading means that the trader is most comfortable and understanding when it comes to that style/pattern of trading.

Knowing your pattern of trading means the best and most comfortable way a trader can trade without being affected by time or other duties.
A scalp trader and a swing trader do not use the same pattern/indicator and formula in trading, this is because a scalper trades in short-term while a swing trader trades in a long-term.

A scalp trader make use of the RSI indicator which give a quick trading signals aiding the traders in reduction to the size of their stop loss(SL) which is beneficial to the scalper.

With the knowledge of market price trend, a trader would be able to know or examine the particular and kind of indicator to use in commencing a trade. This gives or serves as leverage to the trader where by the trader already understands the markets trends.

For a trending Market, technical indicators such as the Moving Average Convergence Divergence (MACD) and The simple moving average (SMA) with other related indicators are more advisable and effective to use, while in a ranging or sideways trend the volume based indicator (VBI) and the volatility indicator are more reliable and advisable to be used in the market.

All these processes are step to step process in determining the factors that are needed to be considered while using an indicator, omitting or neglecting any of the steps would render you asset a loss profit, because a trader can’t jump into trade without having a pattern of trading and the rest.

Understanding the type of indicator to be used in the market is an important thing to do. Knowing fully well that over 100s of indicators In the trading system, the all have there different functions and time best to be used. In other to carry out a trade for instance with the use of the stochastic oscillator, knowing fully well the function of the indicator helps a trader in carrying out an effective trading. The stochastic oscillator being used to measure and determine the overbought and oversold region of an asset gives the trader a higher chance of making a successful trading but also with the use of other technical analysis tools.

When we talk about confluence in trading what do we mean?, we meant the overall combination of different technical indicator tools in confirming other technical indicator tools in other to ascertain a correct result, where by the correspondent of the technical indicator tools depicts a higher chance of profitable trading.

Confluence trading is derived when one technical indicator is joined together with other technical indicators, might be 2,3 or 4 depending, in other to ascertain a confirmative result in line with the price action.

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Question 2(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 ).

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The word confluence is an English word which means to “collaborate”, to bring together of two or more different things. Now in relation to trading as I earlier explained confluence trading to be the combination of two or more technical indicators in a particular asset in other to determine if the different indicators brought together would give and project a single and same result.

Confluence trading is all about merging, and combination of different techniques, but in as much as the as this pattern of trading, market prices can go opposite to the analysis foretold by this different indicators, and this is as a result of fundamental issues which comprises of world economy, currency value and other external factors which are liable to affect the trading system.

Below is an illustration of a confluence trading pattern;

_{My trading view app}
Following the graphical illustration above, I would explain my observations. The following technical indicators used in the image are as follows;

• The Stochastic indicator
• The Bollinger bands Indicator
• The Parabolic SAR Indicator

As indicated in the image the different indicators used, we would notice that the 3 different indicators gave the same signal result In line with price action. The stochastic indicator showed that the price of the market has crossed the overbought region, which it actually lasted for some hours ranging from 6:00 pm - 1:00am. But after the false signaling, there was a Retracement in the direction of prices which went downtrend.

This was confirmed also by the Bollinger band at the point where the candlestick price crossed the Resistance level of the Bollinger Band which after, was an opposite Retracement in market price.

The parabolic SAR which show the current movement of market price also confirmed the short-term movement of assets price. The parabolic SAR which is seen above the price trend movement depicts a downward trend of the asset price.

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Question 3(a)

Explain how you can filter false signals from an indicator

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False signaling is the wrong movement of market price on responds to the technical indicator used. This is the process whereby the technical indicator which serves as a Trader-guide in Market shows false or in other word, wrong signaling which can mislead traders who Enters the market with Using a stand-alone indicator.

False signals are mostly because of fundament analysis which is as a result of external factors (currency depreciation, economy value, government and policies) effect in the trade market.

In other to filter a false signal a trader who is entering a market must learn to be observant of market price movement. When a trader is observant of the prices of assets in the market, it helps to detect when a signal is going wrong and exit from placing any trade.

Let’s take for instance the illustration below in description to false-signals, using the BTC/TUSD chart

_{Screenshot from my trading view app}

We could notice the long lasting duration of BTC/TUSD price at the overbought region which is a false signal following the stochastic rule and function. Unlike other prices in the chart above, we could notice the quick Retracement of prices to the opposite direction when it hits the overbought and oversold regions. scalpers who trade using the stochastic indicator as a stand-alone technique would have a bad time trade here.

So in other to filter a false signal, a trader must first observe the market trend, then apply a confluence trading pattern to enable an efficiency in result, then the trader must look at the main point of the market which is the price action in other to ascertain accuracy, knowing when not to place a trade and waiting for the next cycle to commence.

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Question 3(b)

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

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Divergence is the filtration of false-signals in other to ascertain the correct price/trade movement. Divergence is the opposite movement of price assets to the indicator used, on a normal bases this would be said to be a false signal which could affect traders, but the filtration of this false-signal is what leads to divergence in market prices.

Below is an illustration of ETH/USD chart showing divergence in price trend.

_{Screenshot from my trading view app}

Following the illustration above, we would notice the opposing movement of the stochastic indicator in comparison to the actual price trend.

Divergence can help in achieving a good trading decision with the fact that it detects and signals weak trends and by this aiding traders to avoid commencing trade at the moment, As there could be a possibility in trend reversal.

Divergence predict price movements with the fact that it points out the weak trend, which signals possible reversal in price Movement.

In divergence, when the indicator for instance, the RSI signals a bullish trend while the price chart is showing a bearish movement, this serves as an insight to traders that their would be bullish uptrend in the price chart.

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Question 3(c)

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

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I would be making use of the stochastic indicator as the indicator of my choice.

Bullish divergence takes place when the price chart signals the formation of lower-low while the stochastic indicator signals the formation of lower high. This resulted to a bullish trend after price reversal.

This indicates the powerful movement of buyers in the market, depicting the bullish trend of price. With sellers not being able to withstand the buyers pressure depicts the possible reversal of price movement upward.

I would be using the illustration below to explain more in details what the bullish divergence means

_{Screenshot from my trading view apps}

The BTC/USD chart above shows the formation of bullish divergence, where the scholastic indicator shows the formation of lower-high while price charts depicts the formation of lower-low which signals a reversal in an uptrend.

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Bearish divergence takes place when the indicator shows the formation of lower-low, while the price chart depicts the formation of higher high. The lower low trend signal by the stochastic indicator depicts the weakness of the bullish trend which Later forms a Retracement in the price chart.

Using the illustration below to explain more in detail what the bearish divergence looks like

_{Screenshot from my trading view app}

The BTC/USD chart above shows the formation of bearish divergence which was as a result of the formation of lower-low by the indicator and higher high by the price chart signaling a bearish Retracement of a price chart.

Traders who can take risks, take advantage of the divergence counting on trend reversal of price chart.

The conservative traders, those who are scared of taking the risks would rather wait for a leading signal before commencing a trade.

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NB: High-risk traders have a higher chance of making more profit from a well analyze divergence trend than the conservative traders

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CONCLUSION

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Technical Indicators both the leading and lagging indicators are of great essence and important in carrying out an effective and positive trade, With the fact that they predict future price chart and also goes in hand with the current price trend.

Technical indicators work best with the observation and use of confluence trading, which gives a better chance to a positive and profitable trading result.

As a trader, you should be able to understand your trading style and Differentiate the different kinds of technical indicators with their functions and also not forgetting the use of other technical analysis and indicators for a good trading result.

Thank you so much professor @reminiscence01 for this educative and intriguing course.