In this article we are going to discuss the most common indicators used by traders to try to figure out the next move of the market. Read our previous article as an introduction to trading to be able to define candlesticks, trends, support and resistance. All the indicators that will be mentioned in our article are built-in indicators on tradingview, can be used easily, and can be combined to achieve more secure trades. In the link below you can read our previous article.
Trading for Beginners 1st Article
In continuation, we are going to explain the most common used indicators, advantages and disadvantages of each one and the possibility of the combination that fits each and every indicator.
1. Heiken Ashi Candles
Our first indicator is the Heiken Ashi Candles, can be chosen easily on Trading View. The name means "average bar", it is mainly used to identify the general trend of the market, can be used on different timeframes. Hollow or green candles with no lower "shadows" indicate a strong uptrend: Let your profits ride. Hollow or green candles signify an uptrend. Candles with a small body surrounded by upper and lower shadows indicate a trend change. Filled or red candles indicate a downtrend. Filled or red candles with no higher shadows identify a strong downtrend. In the image below you can clearly observe that the look of the chart after using Heiken Ashi candles become much smoother for beginners. This is a 1hr chart of SXPUSDT.
2. Relative Strength Index
RSI is an indicator is used to define the momentum of the market, the default setting of the RSI shows that a specific coin is being overbought and the possibility of a pullback when the value is above 70, and that it is oversold when the value is below 30 and the possibility of a pump. But the inconvenience of the RSI is that the value can get over 70 and price keeps on pumping. Other professional technical analysts suggest that if the value of the RSI is above 70 on daily and weekly timeframe, this means that we are in a bull market. In the next image you can observe the RSI indicator and correlate the value of RSI to the recent market movements. This is a clear example where RSI indicator shows an overbought are followed by a pullback in the market.
Also the RSI indicator can be used for identifying bullish and bearish divergence. A bullish divergence shown in the image below is when the price shows lower lows, but the RSI indicator is starting to recover to normal values. A bearish divergence is observed in an uptrend producing higher highs but the RSI indicator is getting lower.
The RSI also has hidden divergence, will be explained later after mastering the basics of each indicator.
3. Exponential Moving Average
The EMA is a consequent of simple moving average, used by both beginner and professional traders. The EMA indicator is used to define the general trend of the market, as well as potential entry prices and exit signals. EMA has different representations in the same chart depending on the value of the EMA chosen. The 200 EMA is used to identify the general trend. The combination of other EMAs is basically used to identify breakouts, entries and exits. The most common combinations used are: 12 and 26, 7 and 25, 20 and 50. Whenever the lower EMA crosses over the other EMA is an indication of a long, and if it falls below it is an indication of a short. Longs are taken only if the price is trading above the 200 EMA, and shorts are taken only if the price is below the 200 EMA. Also the EMAs are used to identify support and resistance areas.
4. Moving Average Convergence Divergence MACD
MACD is a trend following momentum indicator, one of the most commonly used, with high accuracy ratio. The MACD indicator can be used as an indicator for both bullish and bearish momentums. In the image below you can clearly see the cross of the MACD indicator. Also the histogram on trading view can be used to identify the strength of the trend. Whenever it is a bullish cross, and the green colour gets brighter, this is an indication that the trend is getting weak. The same happens on bearish divergence.
5. Bollinger Bands
Bollinger bands are used to characterise the price and the volatility over time. Defining high and low prices on a specific timeframe. Bollinger bands can be used to buy whenever the price touches the lower line, and sell when the price touches the upper line. But this indicator can be used to predict a near episode of high volatility whenever the 2 lines get closer to each other. Also it is combined with the RSI indicator to predict the next way of the volatility episode.
6. Stochastic Oscillator
The Stochastic Oscillator is an indicator used to identify the momentum, that uses support and resistance levels. One of the easiest indicators to use for beginners, in the image below you can clearly see the method of use of this indicator for buy and sell signals.
In this article we discussed 6 of the most common used indicators for trading, in the next article we are going to discuss the Ichimoku cloud, Fibonacci retracement and general idea of the Elliot's Wave Theory. Also we are going to discuss the possibility of combining several indicators.
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