Welcome again to week 2 of the season 4 in the Steemit Crypto Academy. Last week was awesome and this week is going on well, too.
This homework is submitted to Professor @reminiscence01 in response to the homework he gave after the end of his lecture. He taught "Technical Indicator" and he really dealt well with the topic.
So, I will be attending to the questions given one after the other.
Question 1
(a) In your own words, explain Technical indicators and why it is a good technical analysis tool.
(b) Are technical indicators good for cryptocurrency analysis? Explain your answer.
(c) Illustrate how to add indicators on the chart and also how to configure them. (Screenshot needed).
a. In your own words, explain Technical indicators and why it is a good technical analysis tool.
In finance trading, there are two methods that are often used by traders to analyze the market. These methods are, fundamental analysis and technical analysis. Fundamental analysis deals with the use of economic, social and political events and calendars to predict the movement of price of an asset or commodity. Technical analysis deals with the use of graph or chart which often contain candlesticks, line, Heikin-Ashi etc which represents the behavior of traders in the past and technical indicators to predict the movement of price.
So, In this article, we are going to be discussing one of the tools used in technical analysis, technical indicators.
Technical indicators are tools used in technical analysis. Technical analysis are used by the traders to predict the movement of price of an asset. These indicators are often created to determine the past data such as price, volume highest level or lowest level etc and used these data for the current data.
Technical indicators are plotted on the price chart. The indicators react as the price of an asset move. And as the price moves the indicators are also expected to move with the price, especially in the direction of price.
There are areas where price of an asset has had difficulty in the past. We know that price movement can't continue to move in certain direction without reversing. So, the areas where price of an asset reserve is where it has difficulty. Now these areas are important areas in the market, especially if the price has reacted to the place several times. Now, to know if the price will still react to this place, technical indicators may be helpful. Once price visit the area, if there's any reaction on the technical indicators, then the area is likely going to drive or turn the direction of the price. So, in essence, we can say that traders use technical indicators to position themselves in some key areas.
Why are technical indicators are good technical analysis tools?
Technical indicators are good technical analysis tools because they determine what has happened in the past by calculating some data and show this on their chart, mostly in form of lines. This one of the importance of technical indicators. Traders don't have to be calculating the data themselves. It's already been added to the technical indicators. All traders need is to add them to the chart.
Technical indicators are good technical analysis because they are used to determine the direction of price of an asset. Traders use technical indicators when they want to know which direction the price will follow.
One of the most important aspect of trading is to know which trend an asset is. Sometimes, trend may be very confusing because the price doesn't move steadily. When the price moves, it will retrace. Technical indicators are used by traders to determine the trend of an asset. Once the trend is known, traders can now position themselves to either trade the reversal or continuation.
Furthermore, technical indicators show when an asset is over bought or over sold. A good investor buy and asset when the price is cheap. There is what is called discount price. The price at which an asset is very affordable to purchase, and at those levels, the price of an asset would have been very oversold. So, technical indicators show this discount price and traders can now invest in buying the asset since they know that they are buying the asset at a cheaper price. Technical indicators also show when an asset is at a premium price. This means that the asset is over priced.
Another important factor which make technical indicators a good technical analysis is because, they show when to enter a trade and when to exit the trade. One of the things that often difficult in trading is knowing when to enter and exit. But with the use of technical indicators, traders can easily determine this. Also, some technical indicators give area or level where stop loss should be set.
(b) Are technical indicators good for cryptocurrency analysis? Explain your answer.
Technical indicators are good for cryptocurrency analysis. It's pertinent to know that technical indicators work in any kind of market, be it cryptocurrency market, forex market, stock market etc.
Technical indicators react to price. So, this can mean that technical indicators are priced based and not market based. One may say that cryptocurrency is very volatile and technical indicators may fail because the price can move very quickly in cryptocurrencies. But the truth is, no matter how the price move, technical indicators will follow. Just as it reacts in forex market, it will also react in cryptocurrency market. Actually the plotting of the technical indicators will be different in each asset because the price is not moving the same way.
Technical indicators show the trend of an asset and cryptocurrency market is not excluded. So, if the trend of an asset can be determined in other markets such as stock , forex market etc., then they can also be used to determine the trend of an asset in cryptocurrency market.
One of the uses of technical indicators is that, they are used for confirming the signals. When the traders see the signal from the chart, either with the use of candlestick patterns, waves or any other strategy related to price action, they use technical indicators for confirmation. This is often used to filter the signal in order to avoid fake outs. The use of technical indicators as a confirmation for signals can also be used in crypto market.
If we look at it very well, we will notice that cryptocurrency market is one of the newest market. Some market such as stock have been in existence since and many indicators have been designed for these market. But if you remember, I already mentioned that technical indicators used past data such as opening, closing, high, low of the previous candles for its calculation. It's with these data that technical indicators run and form the current chart line. Crypto assets also have these data. This means that, since they have the data, technical indicators are also good to analyze them.
(c). Illustrate how to add indicators on the chart and also how to configure them. (Screenshot needed).
To add indicator on the chart, I am going to use trading view platform. Visit trading view.com.
Upon entering the website, it will load and open to the official home page of the platform. On the home page, look for the drop down menu at the top of the page. Click on this"drop down box." As you click it, some features will appear. Click on the "chart."
Fig. 1: Trading view Home page | tradingview.com
Upon clicking on the chart, you will be taken to the chart page. At the top of the chart, look for "fx" icon. This is an icon for indicators. Click on it. It's pointed at with a red arrow in the screenshot below.
Fig. 2: Chart Page with "Fx" icon | tradingview.com
As soon as you click on "fx" icon, a page will appear containing box where you can search for the indicator you want to add to the chart. In the screenshot below, I searched for RSI. I wanted to add relative strength index to my chart. So, once you input it, it will search it. Click on it once it appears.
Fig. 3: Indicator Search Box | tradingview.com
Upon clicking on the indicator, it will appear on your chart. Here, I clicked on relative strength index." Let's see this indicator on the chart.
Fig. 4: RSI on the chart | tradingview.com
In the figure 4, we can see that the indicator has been added on the chart.
Having added this indicator on the chart, let's see how it can be configured
To configure any indicator, look for the indicator 's name beside the indicator or at the top left corner of the chart. Once you click on its name, you will see four icons. Click on tthesecondicon that looks like a gear. It's the setting icon.
Fig. 5: RSI Setting Icon | tradingview.com
Upon clicking on the icon, you will be taken to a page where you can edit or configure the indicator. It consists of three features you can edit, style, input and visibility.
By clicking on the input you can edit the length or period of the RSI. You can edit three things here. You can change the period, the indicator timeframe and source. But I'm leaving the length as 14 which is the length that's mostly used.
let's see the screenshot below.
Fig. 6: RSI Configuration (Input Section) | tradingview.com
Also, you can click on the style to edit it. By clicking on it, you will see some of the things you can edit. You can edit the color of the line of the RSI. You will also notice that this indicator has band, upper band, lower band and middle band. You can set these bands to fit your trading style.
Fig. 7: RSI Configuration (Style Section) | tradingview.com
Then, the last thing on the configuration is visibility. I normally leave visibility as default. However, you can edit it, too. Then after you are satisfied with the configuration, you can click on "ok."
Fig. 8: RSI Configuration (Visibility Section) | tradingview.com
Now, let's see an example of the configuration I made on RSI indicator. I changed the color of of the line from blue to red. I removed the background and changed the band line from dash or dot line to plain thin line. See the screenshot below.
Fig. 9: RSI indicator on the chart after configuration | tradingview.com
Question 2
(a). Explain the different categories of Technical indicators and give an example of each category. Also, show the indicators used as an example on your chart. (Screenshot needed).
(b). Briefly explain the reason why indicators are not advisable to be used as a standalone tool for technical analysis.
(c). Explain how an investor can increase the success rate of a technical indicator signal.
(a). Explain the different categories of Technical indicators and give an example of each category. Also, show the indicators used as an example on your chart. (Screenshot needed)
There are many technical indicators today. Developer of the indicators keep developing these indicators because of the deficiencies in the previous ones. Some of the new indicators are often built on the previous ones. These indicators are in categories e.g momentum based indicators, trend indicator, volume based indicator volatility based indicators etc.. In this section of the question, I will be discussing some of the categories.
Momentum Based Indicators
Momentum based indicators that are used by the traders to determine the speed of the price of an asset. These indicators are often used to determine how far the price of a particular asset has moved over a period of time.
The movement of price of some asset may be low some may be fast depending on how the asset reacts per time and what drives the price. In whatever pace the price travels, these indicators will show how far it has travelled.
Examples of these momentum based indicators are:
- Stochastic oscillator
- Relative Strength index
- Relative vigor index
- Commodity channel index
- Moving average convergence divergence (MACD)
Below is an example of relative strength indicator on the chart.
Fig. 10: Momentum based indicator (Relative Strength Index) | tradingview.com
Trend Based indicators.
These are indicators used by traders to determine the trend of an asset. Because trend may be very confusing. There are times when you may not be able to identify the trend quickly by your eyes. These indicators are useful because they clearly give you the trend which the asset is.
The use of trend based indicators will help the traders to know if the market is trending or ranging. A ranging market is a market where there is no clear direction which price follows. If the market is trending, traders may decide to join the trend and may stay out of the market which is ranging.
Some of the examples of trend based indicators are listed below
- Moving averages (Simple and exponential)
- Parabolic SAR
- Ichimoku kinko Hyo
- Average directional movement index, etc.
Let's see an example of this trend based indicator on the chart.
Fig. 11: Trend based indicator (Moving average) | tradingview.com
Volume Based Indicators
Thanks is another category of Indicators. The indicators that belong to this category are used to determine how much of asset is bought or sold at a particular period of time. This is often shown by the candlesticks on the chart. Some candlestick appear very strong and large because at that particular time, many lots are bought or sold in the market.
Volume indicators are added to the chart to determine how buyers and sellers interact over a particular period of time. If they buyers buy with more lots, the volume indicator will show it and if the sellers sell with more lots, the volume indicator will show it.
Few examples of the volume based indicators are listed below.
- Volume indicator
- On balance volume
*Chaikin Money Flow. Etc.
Let's see an example of volume based indicator on the screenshot below.
Fig. 12: Volume based indicator (Volume indicator) | tradingview.com
Volatility Based Indicators
The way the price of asset moves is different from one another. And the way price behaves in each market is also different. For examples, crypto market is quite different from forex market. Price moves be fast in crypto markets than forex market. Thus, crypto market is very volatile than that of forex market. The aggressive movement of price is termed high volatility.
In order to determine the volatility of an asset, traders often use volatility based indicators. These volatility based indicators show when the volatility of an asset is high or low.
Examples of volatility based indicators are:
- Average true range
- Bollinger bands. etc.
The screenshot below shows an example of the volatility based indicator on the chart.
Fig. 13: Volatility based indicator (Average True range) | tradingview.com
(b). Briefly explain the reason why indicators are not advisable to be used as a standalone tool for technical analysis.
Indicators are often not advisable to be used as standalone tool for technical analysis because they may give false signals. One of the things traders must know is that, no indicator is 100 percent efficient and effective. Thanks are not effective because there are lot of deficiencies with them. In fact, you.ay have heard that some indicators are built on the past one to be able to predict the price to some degree of accuracy. For example, random index indicator was built in order to cover up some issues on the stochastic oscillator. But with that, it can only cover it to some extent, it can give 100% efficiency. So, in essence, technical indicators should not be used alone because they give false signals and are not 100% efficient.
In finance trading, there's what is known as "confluence trading." It means having more reasons to enter and exit a trade. The more reasons you have, the higher the tendency of your prediction. Technical indicators will give one reason to enter without knowing whether the reason is right. But if there are other technique or reason, it will serve as confluence for entering the trade. So, technical indicators should be used as a standalone tool because one reason is not enough to take trades. Many reasons to take a trade and exit will give traders confidence.
Furthermore, one of the issues with technical indicators is that most of them are always lagging behind. Before they can react and give signals, price would have gone very far. So of a traders use only the indicators to trade, he won't be able to catch the whole move from the start of a wave or continuation of a movement.
In addition, when the technical indicators are used as a standalone tool in technical analysis, there's high tendency that the traders may lose his Investment. The reasons is, the indicator which he uses may be lagging or leading. If the indicator is lagging, he may not catch the whole move and may not give him maximum return. So instead of having high risk reward ratio, it may end up not having good risk reward because he was late to enter the trade. Also, if the indicator he's using is leading, he may have entered before the price reacts and that may have taken him out of the market.
c. Explain how an investor can increase the success rate of a technical indicator signal.
The success rate of a technical indicator signal can be increased by confluencing it with another technique. For example, a trader can analysis candlestick and identify patterns form on the chart. If the the signal of an indicator is given at an area where the pattern occurs, then that is another confirmation for the signal received from the indicator and that may serve as very key level which drive the price of an asset either upside or downside.
Further, a technical indicator can be combined with another technical indicator to increase the success rate of the signal received from one. For example, a trend indicator can be be combined with a momentum based indicator. Let's say a trader adds a moving average (20 MA and 10MA ) which is a trend indicator to the chart. We know that golden cross of two moving average in the uptrend may mean that the market wants to shift direction from uptrend to downtrend. When this golden cross occurs the trader may open a sell, which sometimes may not go in the direction predicted because of false signals. Now if a momentum indicator e.g relative strength index (RSI) is combined with it, of the signal from moving average is right, then RSI should be at overbought zone. So, in essence combining another technical indicator with an indicator will increase the success rate.
In addition, the best way to use a signal from an indicator is to use it as a confirmation. Technical analysis of price action should be mastered by traders and then the signals from technical indicator will be an added advantage. Thus, if an investor wants to increase the success rate, he should use a signal from an indicator as a confirmation. So it means, as he has one or more signals from price action and a signal from the indicator, he will have many reasons to take the trade and so, the success rate of the signal would be increased.
Another important factor is that, an investor should back test an indicator, he can configure it. In fact, by configuring and back testing it, he may come up with an idea or a strategy that works for him the best. Then once he knows what works, he should stick to it and combine it with other price action technique.
Conclusion
Technical indicators are good tools used in technical anlaysis. Indicators are often classified based on trend, volume, momentum and volatility. Traders use technical indicators to predict the movement of price of an asset.
As good as technical indicators are, they give false signals because no strategy or tool gives 100% accuracy. It is therefore important to combine technical indicators with price action technique. In fact, some traders only use technical indicators as confluence to their price action technique.
Thanks to Professor @reminiscence01 for the great lecture. I have added more weapons to my arsenal.
Written by @msquaretk
CC: @reminiscence01
@steemcurator01
@steemcurator02
@sapwood
Below is the link to the graded homework which was not curated