The types and applications of 5 essential technical indicators for chart analysis

Introduction

Reading chart patterns in cryptocurrency trading is an essential skill for generating profits. There are various types of technical analysis, but one of the most popular is indicators. Traders use them to predict market movements and determine the optimal timing for buying and selling.

In this article, we will provide a detailed explanation of five practical and widely used indicators among the types of technical analysis, including their features and how to use them.

The Significance of Using Indicators in Technical Analysis

By utilizing chart indicators, you can visualize the patterns and market psychology behind price fluctuations. Even within the same type of technical analysis, the tools chosen differ between day traders, swing traders, and long-term investors.

The important thing is not to rely on a single indicator, but to combine multiple indicators. This allows for more accurate market analysis.

1. RSI (Relative Strength Index) - Measures the strength of momentum

RSI is a momentum indicator that determines whether an asset is overbought or oversold. It is expressed as a value between 0 and 100, with generally a reading above 70 indicating overbought conditions and a reading below 30 indicating oversold conditions.

RSI is calculated by comparing the recent price increases and decreases, allowing for a quick judgment of whether market momentum is accelerating or decelerating. However, extreme values do not necessarily indicate a price reversal, so it is recommended to combine it with other technical analysis methods.

2. Moving Average (MA) - Determining the Direction of the Trend

The moving average is a plot of the average price over a certain period and is one of the most commonly used types of technical analysis to visualize market trends. There are two types: Simple Moving Average (SMA) and Exponential Moving Average (EMA).

When the short-term moving average (50 days) crosses above the long-term moving average (200 days), it suggests the continuation of an upward trend. Conversely, if it crosses down, it indicates a shift to a downward trend. Since moving averages are lagging indicators, they are more suitable for grasping larger trends rather than providing immediate buy or sell signals.

3. MACD (Moving Average Convergence Divergence) - Predicting Momentum Reversals

MACD is an indicator calculated by subtracting the 26-period EMA from the 12-period EMA, and it is excellent for detecting changes in market momentum. The crossover between the MACD line and the signal line (9-period EMA) serves as a signal, allowing traders to determine the timing for buying or selling at the crossover point.

In particular, the situation where prices are reaching new highs while the MACD is declining (divergence) often serves as a warning sign of a trend reversal, so caution is necessary. Among the types of technical analysis, using MACD in conjunction with RSI improves the accuracy of the analysis.

4. Stochastic RSI (StochRSI) - Capturing more sensitive buy and sell signals

Stochastic RSI is a hybrid indicator that applies stochastic oscillator theory to RSI. It fluctuates in the range of 0 to 1 (or 0 to 100), with values above 0.8 indicating overbought conditions and values below 0.2 indicating oversold conditions.

This indicator is more responsive than the RSI, allowing for earlier buy and sell signals, but it also increases noise (false signals). When using it for short-term trading, combining it with other technical analysis methods can enhance its reliability.

5. Bollinger Bands (BB) - Reading the Relationship Between Volatility and Price

Bollinger Bands are an indicator consisting of three bands derived from a moving average and standard deviation, which visualize market volatility. When the price approaches the upper band, it suggests that the market is overbought, and when it approaches the lower band, it indicates that the market is oversold.

An important concept is “squeeze.” This refers to a state where all bands are very close together, and it is often followed by a sharp increase in volatility. Conversely, in situations where the band width is widening, a decrease in volatility may be anticipated.

Applying Types of Technical Analysis in Practice

Combining multiple technical analysis indicators can significantly improve the accuracy of market judgments. For example, confirming the trend direction with MA and then looking for oversold conditions with RSI, or checking for divergence with MACD while narrowing down entry points with Stochastic RSI, are important to aim for synergy effects.

The types of technical analysis and the selection of indicators vary according to each trader's trading style. For day trading, sensitive indicators are effective, while for swing trading, a combination with lagging indicators works well.

Learning through practice is the shortest path

Theoretical understanding alone is not enough to master the various types of technical analysis in practice. Experiencing the behavior of each indicator through demo trading and backtesting is crucial. Since the market is always fluctuating and past patterns do not necessarily repeat, continuous learning and trial and error are the shortcuts to success.

Technical analysis is an auxiliary decision-making tool, and remember that it only reveals its true value when combined with fundamental analysis and money management strategies.