Technical Analysis 101: The Best Technical Indicators for Crypto and Stocks
Trading Analysis

Technical Analysis 101: The Best Technical Indicators for Crypto and Stocks

Created 10mo ago, last updated 7mo ago

Trading or investing requires a clear understanding of the coin or stock and its underlying value. That can easily be done by using technical indicators. For those new to the world of crypto, here is a list of the best technical indicators that you can use to generate huge profits.

Technical Analysis 101: The Best Technical Indicators for Crypto and Stocks

Table of Contents

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Watching YouTube videos or reading blogs with similar titles is synonymous with ‘research’ and ‘analysis’ for a big part of the population. And this is exactly how people lose their hard-earned money.

Trading or investing requires a clear understanding of the coin or stock and its underlying value. It doesn’t mean you need to always know the protocol/company to the T, like their debt-to-equity ratio and other fine details. However, at the minimum, you should know the following about a coin/stock:

  • Entry price at which you can afford to buy a coin/stock
  • Potential returns or expected growth in price
  • The time needed to reach the expected price
Technical Analysis (TA) is a popular technique to evaluate stocks or coins based on similar data points and elements. This articulation will tell you about TA while also delving into trading indicators before we conclude with the best indicators for you.

What Is Technical Analysis?

Imagine you are visiting a mall for the first time and you enter the food court to get some food. There are a plethora of options from popular franchises to eateries of local cuisine. Now, how do you decide where to eat?

Idea 1

You can always visit a couple of vendors, observe their hygiene, taste a little bit, and decide to eat at a specific place. In a food court with 20 different vendors, you are less likely to visit all of them and repeat the practice. This means you are likely to miss the best food available in the food court.

Idea 2

There is another technique you can adopt. This involves standing in a corner with keen eyes. You observe which vendor has the most customers and deduce it as the place with the best food. Here, you bet on the assumption that the crowds’ preferences will match yours.

TA or Technical Analysis is very similar to idea 2. Market data drives your analysis of a stock/coin and you trade or invest based on trends and patterns derived from it.

Bonus: Idea 1 is similar to fundamental analysis.

You may also check our guide on fundamental analysis vs technical analysis to understand the difference between the two.

If TA is as easy as we make it sound, is it a foolproof way to maximize profitability?

Not really. Since TA is dependent on the market and its participants, there are certain assumptions that you’d have to make while making a TA-based trade.

Join us in showcasing the cryptocurrency revolution, one newsletter at a time. Subscribe now to get daily news and market updates right to your inbox, along with our millions of other subscribers (that’s right, millions love us!) — what are you waiting for?

The Market Discounts Everything

This assumption is born out of the belief that every factor related to the stock/coin has been considered and is reflected in its price. For stocks, right from dividend declaration to employee layoffs, everything is presumed to be factored into its latest price. Similarly, in crypto, hashing difficulty, governmental adoption, and even tweets are assumed to influence a coin/token’s price.

When a naive investor opens the trading chart, they feel overwhelmed looking at the several random price movements. Green and red lines or candles are their nightmares now. But, TA experts assume that regardless of the time frame, price movements always are part of a trend. Once the trend is formulated, prices move in the same direction.

History Tends to Repeat Itself

This is a psychological assumption deeply engraved in the ABCs of technical analysis. Market participants often react similarly when the price moves in a certain direction. Emotion beats logic as several bearish trends have seen a lot of selling and similarly during bull runs, participants FOMO themselves into buying stocks/coins at nearly their all-time highs.
Now, after learning what the strategy is, we are going to learn about the tools required to make the strategy work. The most prominent tool for a TA-based trader is Trading Indicators.

What are Technical Indicators?

The price charts of any coin/stock are free for diverse interpretations. Hence, during TA, technicals like support levels can go for a toss as every trader with their prejudice intact can draw support lines at different price points. Support and resistance zones are vital and drawing them should never boil down to destiny.
To remove this uncertainty and provide a level-playing field, technical indicators are used. They are mathematical calculations used to plot lines on the price chart to identify trends and key price points of a coin/stock.

Think of trading indicators as a map that guides you through the maze of ambiguity. Using them in coalition with a bit of market psychology and understanding of risk will enable you to make better trading decisions. Given their quantitative nature, you can also automate your trades using these indicators.

Now that we understand how TA works and how we can use indicators to be better traders, let us delve into seven of the best technical indicators.

The Best Technical Indicators for Crypto Assets and Stocks

On-Balance-Volume (OBV)

OBV is a volume-based technical indicator. It studies the accumulated trading volume of a coin/stock for a set time frame. Simply put, it measures the coin/stock’s buying and selling pressure.

The OBV is a cumulative total of the trading volume of an asset. It takes into consideration the trading volume of the previous days, weeks, and even months. There are three simple rules to calculating OBV:

  • If the asset’s price closes greater than yesterday’s closing price,

Current OBV = Yesterday’s OBV + Today’s trading volume

  • If the asset’s price closes lower than yesterday’s closing price,

Current OBV = Yesterday’s OBV - Today’s trading volume

  • If the asset’s price remains constant, then

Yesterday’s OBV = Today’s OBV

Interpretation of OBV is usually as follows;

  • An increasing OBV means more buyers are willing to purchase the asset at the trading price. This is a good indicator of price rallying.
  • A decreasing OBV means selling pressure is high. This is often found near the all-time highs as traders sell to book profits. This marks a bearish sentiment getting started in the market.

If the price movement is supported by the volume, then the trend direction is confirmed, indicating it can be relied upon to set up trades. However, if the price movement is opposite to the OBV movement, it reflects confusion in the market.

Now, to place trades solely based on OBV is not advisable. However, OBV, as a momentum indicator, is credible to rely upon to forecast breakout directions in price. Additionally, traders can leverage OBV to track the flow of money from institutional investors or the big players in the market.

Example 1

A sustained increase in the OBV levels indicates the potential breakouts in price.

Example 2

Both price and OBV fluctuate consistently. This reflects uncertainty in the market as the ultimate breakdown happens with prices falling drastically.

Accumulation/Distribution Line

We move forward with another popular volume-based indicator which is the accumulation/distribution line. It is used to assert the trend direction of an asset based on the relationship between its price and trading volume.
The A/D line measures the flow of money into and out of an asset. This is used to determine if an asset is being accumulated or distributed. Generally, accumulation implies the buying levels of the asset and distribution denotes the selling levels of the asset.

To calculate the A/D line, we need two metrics i.e.

  • Money Flow Multiplier (MFM)
  • Money Flow Volume (MFV)

To arrive at the metric value, here are the formulae

  • MFM = [(C - L) - (H - C)] / (H - L)
  • MFV = Volume for the specific period * MFM

Here,

C - Closing Price,

L - Lowest Price,

H - Highest Price, for that specific period.

Now, the A/D line is drawn at — Previous A/D Line + Current Period’s MFC. Since the A/D line is a running total, the current A/D value is added to the next day’s MFC and likewise, the A/D line continues.

Interpretation of the A/D Line is generally done in relation to the price movements of the asset. And general observations are:

  • When both prices and the A/D line move upward, the bullish sentiment is likely to continue.
  • If both metrics are facing a downtrend, bearish sentiment around the asset is likely to prevail.
  • If prices increase while the A/D line faces a downtrend, it reflects the high selling pressure in the market. This means the asset is likely to break down and face a bearish reversal (distribution).
  • Conversely, if the A/D line moves upward while prices fall, it suggests a spike in the buying pressure as more market participants continue to accumulate the asset.

The A/D line indicator is one of the best ways to confirm an existing trend while also keeping an eye out for extreme buying/selling pressure. Also, it is suggested to never use it as a standalone indicator. Using it in line with other technical aspects will enable you to be a better trader.

Example 1

This is a 6-month chart of Alphabet Inc. It shows how the A/D Line supports the bullish sentiment and the recent surge in the stock’s price follows the template.

Example 2

The price rose despite the falling A/D line reflecting the increase in selling pressure. It resulted in a huge negative breakout in price levels.

Average Directional Index (ADX)

After two volume-based indicators, we move on to our first trend-based indicator i.e. Average Directional Index (ADX). As the name suggests, the key technical measure here is the direction/trend of the asset. It is represented using,
  • Positive directional indicator or +DI — when the trend is upward,
  • Negative directional indicator or -DI — when the downtrend is taking place.

ADX with its accompanying two indicators measures the strength of the current trend of the asset. Based on this strength, traders/investors can place their bets on whether to long or short the asset.

While calculating ADX, the time period is generally divided into 14 bars. However, ADX can also be plotted for shorter timelines like 7 bars or longer ones like 30 bars. While the former makes the ADX line too volatile, the latter is time-intensive, thereby making it unreliable to use while placing trades.

The calculations for ADX are truly complex. But, to save you efforts, TradingView has a built-in ADX indicator. It can be used for a variety of assets like ETFs, futures, stocks, and crypto.
Now, when you use the ADX indicator, the final value i.e. the ADX value is the only priority. The ADX indicator is displayed as a line built from values ranging from 0 to 100. Also, the general interpretation of the values is as follows:
Starting off, ADX values below 25 are a phase of large-scale accumulation and/or distribution. In this phase, the market is in a confused state with regard to the asset. From 25 to 50, not only is there a presence of the trend, but also a confirmation. Here, the market is trying to find the potential support and resistance levels of the asset.
Above 50, it is an indicator of a strong trend with regards to its longevity. Here, the asset reaches extreme price points in its direction. This is a sign of caution as ADX > 50 means investors who are longing are about to book profits while many even place ‘short trades’.

ADX is a trend-based indicator, hence, using it alone is a risky proposition. In conjunction with price movement indicators, like moving averages or support and resistance, ADX can make you a better trend trader.

Example

Bitcoin’s ADX levels remained above 30 for the majority of the timeframe while also touching 60 at times. This didn’t reflect in the price levels of Bitcoin. However, as we zoom out from the chart, the price has rallied higher as the trend gained strength and momentum.

Aroon Indicator

Developed by a stock market expert, Tushar Chande, the Aroon Indicator is a popular trend-based indicator. Similar to ADX, this helps in identifying trends and also measuring the strength of the trend. The Aroon Indicator is composed of two Aroon lines i.e. the AroonUp and the AroonDown. Both these lines are measured on a scale from 0 to 100.
  • What Is the AroonUp Line?
This line measures the strength of the asset’s uptrend by reflecting the number of days since the asset price reached its previous 25-day high. This means if the asset is at its 25-day high currently, the AroonUp value is 100. Likewise, the lower the AroonUp value, the weaker the uptrend is.
It is calculated using this formula — [(number of periods) – (number of periods since highest high)] / (number of periods)] x 100
  • What Is the AroonDown Line?

This line reflects the number of days since the asset price reached its recent 25-day low while also confirming the bearish sentiments in the market. Similar to AroonUp, the closer the AroonDown value is to 100, the stronger the sentiment.

To calculate AroonDown line — [(number of periods) – (number of periods since lowest low)] / (number of periods)] x 100

How to Interpret the Aroon Indicator?

  • If the AroonUp is in the range of 70 to 100 while AroonDown is between 0 to 30, it signifies a bullish market with newer highs expected for the asset.
  • If the AroonUp stays in the range of 0 to 30 while AroonDown is increasing, the bearish sentiment prevails in the market with the asset hitting low prices consistently.
  • AroonUp and AroonDown remain fairly parallel when the asset at a specific price point is consolidating.

Example 1

Both the Aroon Lines move parallel to each other indicating the price consolidation of Bitcoin in the given timeframe.

Example 2

Two observations here: In the former (left), we can see how AroonDown rising above AroonUp indicating a price downtrend. Likewise, the price falls.

In the latter (right), AroonUp broke an extended AroonDown indicating a bullish reversal. After the break, the AroonUp value stayed near 100 reflecting the strength of the uptrend. The prices reflected the sentiment by reaching new highs.

Moving Average Convergence-Divergence Indicator (MACD)

Developed in the 1970s, the MACD is a momentum-based technical indicator used by a large portion of the trading population. By showing the relation between two moving averages of an asset’s price, it reflects the momentum of trends. MACD has three main components, i.e.
  • MACD = 12-period EMA - 26-period EMA
  • Signal Line = A 9-period EMA of the MACD.
  • MACD Histogram = MACD - Signal Line
Note EMA - Exponential Moving Average i.e. a moving average type that prioritizes the most recent data points.
MACD is dependent on moving averages i.e. past prices which means the indicator is lagging. However, given its strong fundamentals, the accuracy of the MACD indicator is high and reliable.

General interpretations of the MACD indicator are as follows:

  • Positive MACD = Increasing momentum of an uptrend (price rise),
  • Negative MACD = Increasing momentum of a downtrend (price fall),
  • If the MACD increases and crosses above the Signal Line, it is a bullish crossover,
  • If the MACD falls below the Signal Line, it is a bearish crossover.

By coupling trend and momentum, MACD has evolved into a popular, yet reliable trading indicator. Also, it provides enough flexibility because MACD can be applied to price charts of different time frames.

Example 1

In the below chart, we make two observations,

  • Crossover 1 (left) i.e. when MACD turns up from below 0, cutting the Signal Line, there exists a strong bullish sentiment.
  • Crossover 2 (right) i.e. when Signal Line falls from the near top, cutting the MACD from below, the market is bearish on the Apple stock.

Example 2

This is another observation with regards to how MACD can be used to identify divergences and reversals. Here, Apple’s stock price hit new highs in relation to the MACD hitting a lower high. This is an indicator of trend reversal and when MACD fell below the Signal Line, the bearish divergence set in and the price fell by a substantial margin.

Now, the crossover line (black dotted line - vertical) would have been an ideal time to place short trades.

Relative Strength Index (RSI)

RSI is a momentum indicator/oscillator which measures the speed and change of an asset’s price movements. RSI values can read anywhere between 0 and 100. It is popularly used to evaluate an asset based on it being overbought or oversold.

How to Calculate RSI?

RS = Average Gain / Average Loss

This is the simple calculation of RSI. However, there are several iterations of the indicator. Rather, use TradingView and its in-built RSI indicator to ease your trading process.

Traditionally, RSI values are interpreted as follows:

  • If RSI > 70, then the asset is overvalued and open for a market correction or trend reversal.
  • If RSI < 30, it is an indication that the asset is undervalued.
  • As RSI rises above the horizontal 30 reference level, bullish sentiments are identified.
  • Similarly, when RSI falls below the horizontal 70 reference level, it is a bearish sign.

Example 1

Example 2

Stochastic Oscillator

The final trading indicator on the list is a momentum indicator called Stochastic Oscillator. It was developed to follow the momentum or speed of the price. This was derived from an accepted rule i.e. momentum changes direction before price.

This indicator oscillates between the range of 0 to 100, measuring the momentum of the asset. With regards to the timeframe, 14-period is the general rule which can be 14 days, weeks, or even months depending on the analyst’s goal.

How to Calculate Stochastic Oscillator?

The formula to construct a Stochastic Oscillator is as follows:

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100
%D = 3-day SMA of %K — This acts as a Signal/Trigger Line

Lowest Low = lowest low for the timeframe

Highest High = highest high for the timeframe

%K is multiplied by 100 to move the decimal point two places

How to Use the Stochastic Oscillator?

  • If the readings are below 20, then the asset’s current price is understood to be nearing its low in that specific timeframe
  • Likewise, if the readings are above 80, then the asset is nearing its highest price in that timeframe
  • Similar to RSI, a reading > 80 is the accepted overbought limit - sell signal
  • And a reading < 20 is the accepted oversold limit - buy signal.

The Stochastic Oscillator as a sole indicator is not advisable. So, using it in combination with a moving average indicator is recommended to build a holistic trading strategy.

Example

Conclusion

This article is aimed at imparting knowledge about technical analysis, trading indicators, and their importance. Also, we delved into the know-hows and employment of seven top trading indicators. Understanding the trading indicators, their utility, and limitations is required before employing any. Coupling this knowledge with your risk appetite and time in hand is necessary to become a successful trader.

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