Steemit Crypto Academy Season 4 Week 4 - Beginner's Course | Technical Indicators 2.
Hello Steemians, I welcome you all to the 4th week Season 4 of the **Steemit Crypto Academy. In this lesson, we will continue our study on technical indicators to properly understand the technical analysis tool and also how to effectively use them.
In the previous lesson, we have introduced technical indicators as a powerful technical analysis tool that a trader can use to effectively boost the success of his/her trading style. Now you want to want to jump into using these indicators in conjunction with other technical analysis tools to make a good trading decision. But I urge you to take a chill pill as we introduce you to other important sections of technical indicators.
Cryptocurrency trading is risky and as a trader, you need to have all the valuable information about the tools you utilize in making investment decisions.
Leading and Lagging Indicators
Though we have discussed the different categories of technical indicators in the last class and also examples of these indicators. There are two types of technical indicators that an investor needs to understand before selecting the best indicators to suit their trading style.
- Leading Indicators.
- Lagging Indicators.
Leading Indicators are indicators that enable traders to spot price movements in the market before the start of the actual move. These indicators enable traders to get quick signals and enter the market on time, thus capturing the entire trend and minimizing the size of their stop losses. An example can be seen on the chart of ADA/USD below.
Leading indicators must have sound interesting to you and you can't wait to use them in catching the entire price movements before they happen. But just relax as we go further in our explanation.
Though leading indicators help you anticipate price movements before they happen by indicating the overbought and oversold regions of price. We know when the price is at this region, a reversal and formation of a new trend is expected to happen. But also know that in a strong trending market, price can remain in the oversold and overbought regions for a long time before reversal. An example can be seen on the chart of ADA/USD below.
From what we have just established, leading indicators are vulnerable to price manipulation and fakeouts. This indicator can mislead a trader into jumping on a false breakout or fake reversal that may just be a retracement of price to continue its original trend. You can best use the leading indicators in a sideways market but bear in mind the setbacks associated with using them and back them up using other technical analysis tools.
Examples of this indicator are mostly the oscillators like the RSI, Stochastic, and the Donchian channels.
Lagging indicators on the other hand, inform the traders about the beginning of a trend after the trend has already started. They lag behind the price and are suitable for long-term trends. These indicators are not prone to price manipulation or fakeouts as they confirm the trend has already started before giving out the signal. An example can be seen on the chart below.
Lagging indicators have their own setback in the sense that, it makes a trader enter the trade when the trend has already started. This leads to missing out on the important market moves and also have a wide stop-loss. Using a lagging indicator might make you enter the market when the trend is already weak and might reverse on you. An example can be seen on the chart below.
The lagging indicators are best used in a longer-term trending market or as a confirmation tool for a strong trending market. Examples of the lagging indicators are most likely trend-following indicators like moving averages, MACD, Parabolic SAR, etc.
Now we have established the two types of technical indicators, I urge you to first understand your trading strategy and also the current market condition. Is the market trending or ranging?. When you answer this question, you can now decide which indicator is good for that trading opportunity.
Factors to consider when using a Technical Indicators
In this section, I will be highlighting the different factors an investor should consider before using a technical indicator for good trading success. There are hundreds of technical indicators out there and not using them properly can still mislead you into making the wrong decisions. Similarly, the number of indicators used doesn't matter. In fact, using numerous numbers of indicators will end up complicating your signal and trading analysis. So here are the basic things to consider when using technical indicators.
Understanding your Trading Strategy
This is the most important factor to consider when using a technical indicator. Understanding your trading strategy helps you select the best indicator that suits your trading style. This also helps you to configure an indicator based on your trading strategy. For example, a scalper cannot be using a 50-period moving average for making an analysis. We know that the 50-period moving average is plotted using price points for the 50 days. This alone cannot help the scalper to make a good trading decision as he only focuses on only short-term information about the market.
Understand the Market Trend
This is another important factor to consider when using a technical indicator. The market can either be trending or ranging. During the trending market, a trader will consider using the trend-following indicators to analyze the market for a good analysis of the market. Similarly, during a ranging or sideways market, a trader can focus on momentum-based indicators and also volatility-based indicators to capture overbought and oversold regions of price and also swing highs and swing lows. This will enable you to sell at a high price and buy at a low price as the market ranges.
Understand the type of Indicator
In the previous section, we have discussed the leading and lagging indicators and how they can affect our trading decision. When using a technical indicator, you need to consider if it is lagging behind price or leading. This helps you to be conscious in the market movements and apply the necessary trading management. For example, a trader using the RSI will need other forms of confirmation to know that price will actually reverse to the opposite direction as he is aware that the indicator gives a quick signal which can mislead a trader into falling for fakeouts and price manipulations.
Just like we have established in the previous lesson, traders needs other forms of technical analysis to confirm the signal given by the indicator. When we talk about confluence in trading, we are talking about obtaining the same signal information from various tools. For example, when the RSI is in the overbought region and we also notice a double top pattern on the chart, these two confluences are signaling a reversal in the price of the asset. The reversal signal will be stronger if we also notice price breaking below the moving average also signaling a reversal. The more confluence you have to back up the indicator signaling, the higher the chances of increasing the effectiveness of using technical indicators for good analysis.
Now we have discussed the factors to consider when using technical indicators, let's look at how we can detect false signals from an indicator.
How to Filter False Signals Using Indicators
One common way to identify a fake signal is to look at the price action and see the reaction of the market after the signal given by the indicator. If the indicator gives a signal and the market reacted towards it, then we can say that the signal is correct. But when the market gives an opposite reaction, then we can say that the signal is fake. An example of a fake signal can be seen using the RSI indicator below.
From the chart above, we can see that the RSI indicator was at an extremely overbought region which signals a reversal in the price of BTC, but we tend to see price in a continuous bullish trend. It is required for a trader to understand that the RSI can continue to remain in an overbought and oversold region during a strong trending market.
Therefore, in order to avoid fake signals from an indicator, you have to ensure that the indicator signal is in confluence with price action. From the chart below, we can see how the price reacted after the RSI indicated that BTC is oversold. There was a significant drop in the price of BTC/USD.
Just like we have discussed in the previous section of this lesson, when the indicator and price move in the opposite direction, we tend to say that the indicator has given a false signal. This false signal of the indicator can be filtered to give a true signal in the market. This is where Divergences come into this lesson.
Divergence is a scenario where the current price of an asset is moving in the opposite direction to the technical indicator. Divergences can be used to filter out false signals of the indicator and also used to detect prices reversals at an early stage. An example of divergence can be seen in the chart below.
The chart above shows a bearish divergence of BTC/USD of the RSI indicator. The bearish divergence occurs when the indicator is making a lower low formation and price is forming a higher high formation. The lower low formation signals a trend reversal of price despite the price showing a bullish signal. This means that the bullish trend of price is weak and a reversal is expected to happen. After that, there was a reversal in the price of BTC/USD.
For the bullish divergence, it occurs when the indicator is signaling an uptrend by the formation of a lower high, while the price action is signaling a downtrend by the formation of a lower-low. The bullish divergence simply means that the downtrend is coming to an end and a possible reversal to the upside is expected. After that, the price reversed to the upside. This can be seen in the chart below.
While most traders might see divergences as a fake signal of the indicator, others can capitalize on it for potential price reversals. The divergences play an important role in filtering false indicator signal and also gives a trader early signal on potential price reversals.
As a beginner, it is required that you understand the market formation by indicating the highs and low points. This will enable you to identify divergences easily and take advantage of them. Also, note that divergences are one of the ways to filter false signals from the indicator. They are not standalone trading strategies as they also fail sometimes. Always manage your risks properly and obtain multiple confluences from other technical analysis tools to support your trading decision.
We have come to the end of this lesson which further explains key information on technical indicators. Indicators are powerful technical analysis tools that play key roles in making good technical analyses. We have also discussed criteria in using an indicator and also how to increase the success of your trading using technical indicators.
Indicators are not standalone tools and they are not always correct in giving signals. It is left for the best select indicators that best suits their trading style and also manage their risks.
Cryptocurrency trading is highly volatile and it is expected a trader has all the valuable information needed to make the best trading decision. The most important thing is the use of stoplosses to protect you against the high volatility of the market in case the market goes against your predictions.
Thank you for being part of this lesson.
Ensure you have understood the lesson before performing the tasks. I encourage you to spend quality time answering the questions and also write in your own words. Remember it is not just about answering the questions correctly. Your creativity in answering the tasks is highly expected.
- 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.
- 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 ).
- 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.
Note: There are more than 100 indicators available for you to explore for this homework task. Please do not repeat the indicators I have used as examples in this lesson.
- Homework must be posted in Steemit Crypto Academy community. Your homework title format should be " [Your Title] - Crypto Academy / S4W4- Homework Post for @reminiscence01".
- Plagiarism is a great offense in Steemit Crypto Academy and it won’t be tolerated. Ensure you refrain from any form of plagiarism.
- Your post should not contain less than 400 words.
- All images, graphs, and screenshots from external sources should be fully referenced, and ensure to use watermark with your username on your own screenshots.
- Use the tag #reminiscence01-s4week4 #cryptoacademy and your country tag among the first five tags. Also include other relevant tags like #indicators, #divergences #technicalanalysis.
- Homework task run from Sunday 00:00 September 26th to Saturday 11:59 pm October 2nd UTC Time.
- Only users with a minimum of 200 Steem Power and having minimum reputation of 55 are eligible to perform this homework. Also, note that you must not be powering down.
- User who have used upvote tools to gain SP or build their reputation are not eligible for this homework.
Note: You can only drop your homework link in the comment section if not reviewed after 48 hours.
The comment section is freely opened for suggestions and feedback on the lesson and homework.