Important notes:

  • Technical analysis (TA) indicators help traders understand asset price movements, making it easier to identify patterns and potential trading signals.

  • Among the many TA indicators available, RSI, moving averages, MACD, StockRSI and Bollinger Bands are some of the popular options.

  • Although TA indicators can be very useful, interpretation of data can be subjective. Many traders use TA indicators in conjunction with fundamental analysis and other methods to reduce risks.

Entrance

Chart indicators are reliable and effective tools preferred by technical analysts. Everyone chooses the tools that best suit their approach and learns to master them. Some prefer to look at market momentum, while others want to filter out market noise or measure volatility.

So, what are the best technical indicators? Every investor's answer to this question will be different. But some indicators are very popular, such as the ones we list below (RSI, MA, MACD, StockRSI and BB). You can learn what these are and how to use them in our article.

What are Technical Analysis Indicators Used for?

Traders use technical indicators to gain more insight into the price movements of an asset. These indicators make it easy to spot patterns in the current market environment and spot potential buy or sell signals. 

There are many different types of indicators and they are widely used by day traders, swing traders, and sometimes even long-term investors. There are also professional analysts and experienced traders who create their own custom indicators. 

In this article, we will provide a brief description of some of the most popular technical analysis (TA) indicators that every trader should have in their market analysis toolkit.

1. Relative Strength Index (RSI)

It is a momentum indicator that shows whether an asset is overbought or oversold. It does this by measuring the magnitude of recent price changes. The standard setting is the last 14 periods (last 14 days for daily charts, last 14 hours for hourly charts, etc.). The data is then displayed as an oscillator that can have a value between 0 and 100.

Since the RSI is a momentum indicator, it shows the speed (momentum) of price change. This means that if momentum increases as the price rises, the uptrend is strong, meaning more buyers are entering the market. Conversely, if momentum is decreasing while the price is rising, this may indicate that sellers may soon take control of the market.

In the traditional interpretation of the RSI, if the value rises above 70, the asset is overbought, and when the value falls below 30, it is oversold. Therefore, extreme values ​​may indicate an upcoming trend change or pullback, that is, the price breaking from the support zone may be pulled back to the support level. However, it would be correct not to see these values ​​as direct buying or selling signals. Like many other technical analysis (TA) techniques, the RSI can give false or misleading signals, so it is always useful to consider other factors before trading.

Want to learn more? You can review our article Relative Strength Index (RSI).

2. Moving Average (MA)

The purpose of using moving averages in financial charts is to smooth price movements and see the direction of the market trend. Moving averages are considered lagging indicators because they are based on historical price data.

The two most commonly used moving averages are the simple moving average (SMA or MA) and the exponential moving average (EMA). SMA is drawn by taking price data for a specific time period and calculating its average. For example, the 10-day SMA is determined by calculating the average price over the last 10 days. On the other hand, EMA is calculated by giving more weight to recent price data. This makes it more sensitive to recent price movements.

As we mentioned before, the moving average is a lagging indicator. The longer the time interval, the greater the delay. Therefore, a 200-day SMA reacts slower to current price movements than a 50-day SMA.

Traders frequently use the relationship of price to certain moving averages to gauge the current market trend. For example, if the price remains above the 200-day simple moving average for an extended period of time, many people consider the asset to be in a bull market.

Traders can also use moving average crossovers as buy or sell signals. For example, if the 100-day SMA falls below the 200-day SMA, it could be considered a sell signal. So what exactly does this decline mean? Indicates that the average price over the last 100 days is currently below the average price over the last 200 days. The idea behind selling here is that short-term price movements no longer follow the uptrend, so there is a possibility that the trend may reverse soon.

Want to learn more? You can review our article Moving averages.

3. Moving Average Convergence Divergence (MACD)

MACD is used to determine the momentum of an asset by showing the relationship of two moving averages. It consists of two lines: MACD line and signal line. The MACD line is calculated by subtracting the 26th EMA from the 12th EMA. The resulting line is drawn above the signal line, that is, the 9-point EMA of the MACD line. Many charting tools also include a histogram that shows the distance between the MACD line and the signal line. 

Users can get an idea of ​​the strength of the current trend by evaluating the differences between the MACD and price movements. For example, if the price is making a higher high while the MACD is making a lower high, the market may be changing direction soon. In this case, what does MACD show us? It indicates that the price is rising while momentum is falling, so a pullback or direction reversal is likely.

Traders can also use this indicator to examine the intersections of the MACD line and the signal line. For example, if the MACD line crosses above the signal line, this could be a buy signal. Conversely, if the MACD line falls below the signal line, this may also be a sell signal.

MACD is often used in conjunction with RSI as they both measure momentum by different factors. These two together are supposed to provide a more comprehensive technical view of the market.

Want to learn more? You can review our MACD article.

4. Stochastic RSI (StokRSI)

Stochastic RSI is a momentum oscillator used to determine whether an asset is overbought or oversold. As its name suggests, it is a derivative of RSI and is created using RSI values ​​instead of price data. A formula called Stochastic oscillator is applied to standard RSI values. Stochastic RSI values ​​generally range from 0-1 (or 0-100).

Stochastic RSI can create many trading signals that are difficult to interpret because it is faster and more sensitive. Generally, it can be more useful near the high and low ends of its range. 

A StockRSI value higher than 0.8 can generally be considered overbought, while a value lower than 0.2 can be considered oversold. A value of 0 means that the RSI is at its lowest value during the measured period (the default setting is usually 14). On the contrary, a value of 1 indicates that the RSI was at its highest value during the measured period.

Just as caution should be taken when using RSI, an overbought or oversold StockRSI value does not mean that the price will definitely change direction. In the case of the StokRSI, this merely indicates that the RSI values ​​on which the StokRSI values ​​are based are near the extremes of their recent measurements. It is also important to note that the StockRSI is more sensitive than the RSI indicator, so it is more likely to produce false or misleading signals.  

Want to learn more? You can review our article Stochastic RSI.

5. Bollinger Bands (BB)

Bollinger Bands measure overbought and oversold conditions as well as market volatility. It consists of three lines: SMA (middle band), lower band and upper band. Settings may vary, but generally the lower and upper bands are two standard deviations away from the middle band. As volatility increases and decreases, the distance between the bands increases and decreases.

Generally, the closer the price is to the upper band, the closer the asset being charted is to overbought conditions. Conversely, the closer the price is to the lower band, the closer the oversold conditions are. Most of the time the price will stay between the bands, but occasionally it can break out. While this is not a signal in itself, it may be an indicator of unusual market conditions.

Another important concept in Bollinger bands is compression. It refers to a period of low volatility where all bands are very close to each other. It can be used as an indicator of a possible period of future volatility. Conversely, if the bands are too far apart, a period of low volatility may follow.

Want to learn more? You can review our article Bollinger Bands.

Last word

Although indicators display data, it should be noted that interpretation of data is highly subjective. Therefore, it is always helpful to take a step back and evaluate whether your personal biases are affecting your decision-making. A direct buy or sell signal for one investor may be just market noise for another. 

Like most market analysis techniques, indicators are most useful when used in conjunction with each other or with other methods such as fundamental analysis (FA). The best way to learn Technical analysis (TA) is to practice a lot.

Additional Reading

Disclaimer: This content is provided to you "as is" for general information and educational purposes, without any representation or warranty of any kind. This content should not be construed as financial, legal or other professional advice and is not intended to recommend the purchase of any particular product or service. You should seek advice from appropriate professional advisors on this matter. Please note that where an article is contributed by a third party, the opinions expressed are those of that third party and do not necessarily reflect the views of Binance Academy. For more information, you can read our full disclaimer here. Digital asset prices may fluctuate. The value of your investment may fall as well as rise and you may not get back the amount you invested. You are solely responsible for your investment decisions and Binance Academy accepts no liability for any losses incurred. This material should not be construed as financial, legal or other professional advice. For more information, please see our Terms of Use and Risk Warning sections.