Every profession has tools they rely on that accommodate their success, and trading is no different.
Although there are many resources traders leverage, technical indicators are perhaps the most vital to their success when identifying the best buying and selling opportunities.
While everyone may not share the same goal of becoming a professional trader, it is, at the very least, essential to understanding technical indicators, their importance, and how to apply them if one desires to become a profitable trader at the very least.
The most common global indicators traders use are support and resistance, oscillators, and volatility indicators.
Each indicator carries its unique purpose. Technically, there isn’t one primary indicator better than the others, as it all comes down to comfort, experience, and preference.
It’s typical to see multiple indicators included in one’s trading strategy. Even then, it’s a process of trial and error, implementing and swapping indicators until the “perfect” formula is pinpointed.
Support and resistance levels help traders identify where a potential price, bottom, or top is. They are used in various situations, whether long or short, on a position.
The lower support level can act as a safety zone of assurance for someone going long on an asset, signaling a possible opportune time to buy. In the same instance, it can tell a trader when to exit their long if the support is broken, meaning that further downside is likely.
The upper resistance level displays either a past zone of support or where an asset had difficulty breaking out of and may have a similar experience if revisited. It’s a common practice to see traders exiting a portion of their positions and taking profits at this level.
The exact opposite applies to a trader in a short position. They may use the upper resistance level to enter a short and the lower level of support as a time to exit, just in case the price bounces off the lower line.
While these levels are used universally in nearly all strategies, specific indicators fall under this category.
These indicators use a range between 1 and 100 to measure the price momentum of crypto. The higher the number, the more overbought an asset tends to be, while lower numbers show signs of an oversold asset.
There are two primary oscillator indicators, leading and lagging.
A leading indicator uses current market data to predict possible future price movement for the asset. In contrast, lagging indicators use past data to accomplish the same task.
Many traders use both leading and lagging indicators at the same time.
However, the high volume doesn’t necessarily equate to a bullish scenario, as it could represent a sell-off.
When applied correctly, it can signal a potential breakout if there is positive volume while the price nears a resistance level.
If the volume is obsolete or there is a high sales volume while the price is nearing a previous support level, a breakdown below that level may be probable.
A word that everyone in the cryptocurrency space is familiar with. Volatility indicators help display times when the market may be experiencing either wide price swings or consolidation.
High volatility during trending systems complements swing traders, helping them confirm desirable entry and exit points until the trend is broken.
A combination of high volatility while approaching a previous resistance level may indicate a potential breakout to the upside, where a trader would traditionally remain in their long position.
With low volatility, you can utilize the previously covered channel trading, as it’s more likely the coin will remain within the range until the volatility increases.
With so many indicators available, the only way to find which ones are best for you is to test them. That’s also why documenting or journaling your trades is crucial to your success as a trader.
Make the practice of journaling your trades a habit. It will become easier to identify which indicators are best serving you or not in the future.
As you go, you will learn how to fine-tune your strategy, adding and removing different indicators as needed, until you will have formed a solid, tried, tested, and proven trading strategy.