Technical analysis software and trading platforms have tens or even hundreds of indicators sewn into them. You can find many investors who are die-hard followers of certain indicators. They have plenty of examples to prove that their favorite indicator is the most effective in the financial market. 

Technical indicators perfectly match the programming of investment machines due to their objective nature. As a beginner, understanding different types of indicators helps you perform technical analysis effectively. 

This lesson provides an overview of technical indicators. 

Contents

• What are technical indicators?
• Types of technical indicators 

What are technical indicators?

A technical indicator is a mathematical pattern derived from historical data of price movements. Technical indicators, also known as, “technicals” are shown graphically on charts. They focus on historical trading data of price, volume, and open interest data, etc. 

The indicators in technical analysis serve as an aid in the interpretation of the charts. They show the dynamics of the price movement of an asset, the strength of a trend or volatility. Investors and traders use different types of indicators to predict future price trends and make trading decisions. 

As we discussed in previous lessons, unlike fundamental analysis, technical analysis focuses on patterns of price movements, trading signals, etc. Though indicators help you forecast future trends, it is always important to consider other information as well to get a clear picture. 

Types of technical indicators

Although there are various types of indicators, the group of the most frequently used indicators is usually limited to a dozen or so. Indicators can be broadly classified into the following types. 

• Momentum indicators or oscillators (eg. Relative Strength Index (RSI), Stochastic)
• Trend or trend strength indicators (eg. Moving Average Convergence Divergence (MACD), Moving Averages)
• Volatility indicators (eg. Average True Range (ATR))

The above division is rather fluid because some of the oscillators can be trend indicators and vice-versa. Some indicators dedicated to the analysis of trends or strength of trends will take the shape of oscillators. It is important to note that using them does not differ significantly from the methods known from other markets. 

Indicators measure the dynamics of price movement i.e., how fast the price moves over time. Reaching extreme values of the oscillators is interpreted as a too fast price move which in turn leads to a price correction. Most oscillators have three interpretations that are discussed below.

• Reaching extreme values - The market is then said to be overbought or oversold and this can be interpreted as a warning signal. 
• Divergences - Discrepancies between the behavior of the oscillator and the price. For example, the rate continues to rise and the oscillator is falling. 
• The intersection of the zero level - This can be a signal to trade in line with the direction of the main trend. 

Let’s look at the typical layout of the trading platform that is given below with three indicators (RSI, MACD, and Stochastic oscillator).


 

There are multiple technical indicators that can help you identify the trends in price movements to make better trading decisions. Some of them are cycle volumes, momentum readings, volume patterns, moving averages, Bollinger bands, sentiment indicators, Elliot waves, etc. 

Indicators are an essential part of technical analysis that will help you reap potential profits from crypto trading.