Finance

A little guide on some of the most popular technical chart indicators

Do you do a technical analysis? If so, which chart indicators do you use? These are tools that help any trader to make more sound trading decisions. If you know them by heart, then we are glad to know that. If not, this is a little guide to help you get started and be familiar with them.

The Bollinger bands

We use Bollinger bands when we want to know how volatile the market is. They are like support and resistance levels. Under Bollinger bands, there are two strategies. The first one is the Bollinger bounce that depends on the price’s tendency to always return to the Bollinger bands’ middle. It suggests a buy signal if the price is lower than the Bollinger bands and a sell signal if it is higher. Bollinger bounce is perfect for ranging markets. The other one is the Bollinger squeeze that we can use to learn breakouts earlier than usual. If the Bollinger bands squeeze, it means that the market is silent, and a breakout might happen soon. If the breakout did happen, it suggests that we enter on the side where the price broke out.

The MACD Lines

MACD means “moving average convergence divergence.” We use it to catch trends early and spot trend reversals. It has two moving averages: fast and slow. It also has a histogram which are vertical lines that measure the distance between the two moving averages. The moving average lines are not the price’s moving averages, but it belongs to others. It may sometimes lag since it uses too many moving averages. One way of using it is waiting for the fast line to cross over or under the slow line before entering a new trade, as this signals a new trend.

The parabolic stop and reversal

The parabolic SAR is the easiest indicator to use to identify trend reversals and give bullish and bearish signals. Dots above the candles are sell signals, and dots below are buy signals. They are best used in trending markets with long rallies and downturns.

The stochastic oscillator

It tells us when the market condition is overbought and oversold. Moving averages above 80 mean an overbought market, and it’s suggested to sell while moving averages below 20 means oversold market, and it’s recommended to buy.

The relative strength index (RSI)

It also tells us whether the market is overbought or oversold. RSI above 70 means overbought, and it’s suggested to sell while RSI below 30 means oversold, and it’s suggested to buy. RSI also confirms trend formations. Wait for the RSI to move above or below 50 if you suspect a forming trend before entering a trade.

The average directional index (ADX)

The ADX lets us know how strong a trend is. It is scaled from 0 to 100. A reading below 20 means a weak trend, and a reading above 50 means a strong trend. ADX can confirm if a pair will go on in its present trend. ADX can also tell you when you need to close a trade early, like if it reaches below 50, it means that the trend is getting weaker.

Ichimoku Kinko Hyu (IKH)

It helps us gauge the future price momentum and know where the support and resistance may be in the future. Ichimoku Kinko Hyo is a Japanese phrase that means a glance at a chart in equilibrium where “Ichimoku” means a glance, “Kinko” means equilibrium, and “Hyo” means chart. When the price is above the Senkou span, the top line is the first support level, and when the price is below the Senkou span, the bottom line is the first resistance level, and the top line is the second resistance level.

The Kijun Sen indicates future price movements. A price higher than the blue line means that it can go higher, while a price below the blue line means it can go lower.

The Tenkan Sen indicates market trends. A red line moving up or down means a trending market, and a red line moving horizontally represents a ranging market.

The Chikou span is a lagging line. A Chikou line crossing the price in a bottom-up direction means a buy signal, and it is a sell signal if it travels in a top-down direction.

A little reminder

This article will only guide you on which one to use. However, if you ever decide to use any of these, please know that it will still be much better to know them more first. Happy trading!