At the start of every trader’s journey, you’re going to be introduced to the best technical indicators as a fundamental tool for market analysis. The main reason for this is that they are easier to understand particularly for newbies. But seasoned pros also use them too, often as a key component of their trading strategies, because they have proven to be very effective in all sectors of the financial markets.
The only problem is that even there are dozens of technical indicators integrated into all trading platforms. For a beginner, this dilemma of choice can be crippling, while experts sometimes get overwhelmed by the variety to choose from. To avoid this hurdle in your own trading, we recommend starting with a handful of highly effective yet easy-to-understand indicators such as these: 1
This is perhaps the most common and one of the best technical indicators since it can be used in any financial market including cryptocurrencies, forex, stocks, etc. It is also one of the easiest to use and learn while remaining very effective when understood and used properly.
You recognise it as a line running through the candlesticks on the main price chart and generally follows the direction of market prices. For this reason, it’s used to quickly indicate the market trend so that you can make a decision on the direction to trade the markets.
In the above example, for instance, the market was generally in an upward trend and so was the moving average line. An opportunity to buy the asset is presented when the candlesticks cross above the moving average line as indicated in the chart and vice versa.
The areas marked by a shadow when the moving average is within the candlestick bodies are regions of consolidation. They could indicate that the trend is reversing and a signal to exit the markets or just that the markets are being tested. Because of this, they are critical levels around which you should consider exiting the market or placing a stop loss to avoid being caught out in a reversal.
Aside from this, moving averages can also be used to establish key pivot points in the market because they eliminate the noise of the typical candlesticks. For this, though, we recommend using the simple moving average (SMA) over the exponential moving average (EMA) as it is more effective for this purpose. The EMA is better suited for short-term plays by day traders, but not so much for identifying long-term trends.
Moving Average Convergence/Divergence (MACD)
As you can tell from the name, the MACD indicator is derived from moving averages. Specifically, it is mainly formed by the overlaying of two moving averages set at different parameters – one fast and the other slow. Due to this difference, the two will frequently intersect creating a cross to the upside or downside, which is a signal to buy or sell respectively.
A cross by the faster moving average (brown/red) to the upside alerts you to a bullish market and vice versa. But as you can see from the chart above, market prices didn’t immediately react to the cross and usually took some time to register. This is why there’s also a zero line with coloured waves to indicate bullish or bearish market conditions.
The zero line provides additional information confirming a trend, thereby making the MACD a lot more accurate than using moving averages alone. That is why the indicator is sometimes referred to as the ‘king of oscillators’ and one of the best technical indicators; also because it can be used through all market conditions.
Relative Strength Index (RSI)
Oscillators are a category of technical indicators that swing upwards and downwards in sync with market velocity (strength). When an asset is being rapidly bought in a bull market, the oscillator will trend upwards and vice versa. The RSI is the most commonly used oscillator and it too can be used in all market classes.
The relative strength of the market is ranked from 0 to 100 to represent the momentum with 0 indicating a bearish momentum and vice versa. But since markets can never lean totally to one side or the other, the relative strength index is marked around 30 and 100.
A reading of 30 or below indicates oversold market conditions, suggesting that the bears are cashing out and that a reversal may be imminent and that you should look for buying opportunities and vice versa. These opportunities are marked by the crossing of the two lines of the RSI, with an upward crossing of the faster line signalling a rise in bullish momentum and vice versa.
Stochastics also fall under oscillating technical indicators, but they are ideal for ranging and choppy markets as compared to the RSI. The similarity between the two can be clearly seen in the chart below where the two indicators could have been used interchangeably to find the same buying and selling opportunities in the same market.
However, you will also notice that the stochastic oscillator, while set to the default parameters, had a lot more swings between the overbought and oversold market conditions. That is because it is more sensitive to recent price changes and thus more effective when markets are volatile. It also means the indicator can be used when markets trade in a range because it can factor in minor price changes and generate a trading signal.
Equilibrium is one of the most basic tenets of a free market. It implies that the value of an asset will always return to fair market value through the balance of buyers and sellers, preventing runaway prices in either direction. Bollinger bands were created based on this principle and use 3 lines to represent it on a price chart.
While using Bollinger bands, the centre line is used to show market sentiment. When the candlesticks are below this line, this indicates a bearish market and vice versa, while a cross to either side is a signal of a trend reversal. Meanwhile, the two outer lines are used to represent the strength of the momentum. For example, when the candlesticks touch the upper line, the market is strongly bullish while a disconnect signals a possible trend reversal.
Like the MACD, this indicator is among the best technical indicators as it combines multiple values to become very effective while remaining simple to use and understand. Besides, it can be used in all markets and market conditions, so you really want to give it a try today.