What is a ‘Technical Indicator’
A technical indicator is a metric that is derived from price and volume activity in a stock, asset, or currency. Technical indicators are utilized to predict future price or simply the general price direction, of a crypto currency by looking at past patterns.
Technical indicators, are distinguished by the fact that they do not analyze any part of the fundamental activity in the cryptocurrency ecosystem, like world events, the news and media, and protocol disputes such as hard forks. Technical indicators are often used by traders in the market for analyzing short-term price movements. To a long-term cryptocurrency investor, most technical indicators are of little value, as they offer no insight on future events which heavily influence the highly speculative crypto market.
Breaking Down the Technical Indicators
The RSI, or Relative Strength Index, a momentum oscillator that measures the speed and change of price movements. The RSI ranges from zero to 100. By design, a cryptocurrency is considered overbought when above 70 and oversold when below 30. The RSI can be an effective tool to identify the general trend of a cryptocurrency.
100 RSI = 100 - -------- 1 + RS RS = Average Gain / Average Loss
A stochastic oscillator helps to show you how strong the current market trend is by looking at specific time period and comparing the current present price to the highs of a specified period.
A stochastic oscillator is based on the idea that in a bullish trend, prices will close near their high of the period and in a bearish trend, prices will close near their low.
A stochastic oscillator oscillates between 0 and 100, with the threshold for oversold being 20 and over bought being 80. If you see a STOCH of 20 or less, this is a good indication that a cryptocurrency is being oversold, or sold below its true value. The same can be said if you see a STOCH of 80 or more; this tells you that the cryptocurrency is being overbought. It is important to note that due to their speculative nature, cryptocurrencies can withstand overbought conditions for long periods of time without seeing a reversal or correction.
%K = 100(C - L14)/(H14 - L14) Where: C = the most recent closing price L14 = the low of the 14 previous trading sessions H14 = the highest price traded during the same 14-day period %K= the current market rate for the currency pair %D = 3-period moving average
The STOCHRSI, or Stochastic RSI, is more or less so an indicator of an indicator: the RSI. This tool is utilized in technical analysis to give a stochastic calculation to the RSI indicator. Essentially, it measures the RSI relative to its own high/low range over a specific period of time.
The Stochastic RSI is an oscillator that calculates a value between 0 and 1 which is then plotted as a line. Like the RSI and the Stochastic Oscillator, the STOCHRSI is generally used for identifying overbought and oversold conditions.
Here are some approximate benchmark levels and what they mean:
1 Day Stoch RSI = 1 when RSI is at its highest level in 1 day.
1 Day Stoch RSI = .8 when RSI is near the high of its 1 day high/low range.
1 Day Stoch RSI = .5 when RSI is in the middle of its 1 day high/low range.
1 Day Stoch RSI = .2 when RSI is near the low of its 1 day high/low range.
1 Day Stoch RSI = 0 when RSI is at its lowest level in 1 days.
Stoch RSI = (RSI - Lowest Low RSI) / (Highest High RSI - Lowest Low RSI)
MACD (Moving Average Convergence Divergence)
The Moving Average Convergence Divergence, or MACD was developed by Gerald Appel in the 1970s, Today, it is one of the most widely accepted and utilized indicator by traders. Traders utilize the MACD to help them determine the direction of a trend and momentum of a trend. Additionally, the MACD has been proven to be and effective tool for spotting potential trend reversals.
The MACD is primarily used to confirm a trade based on other strategies such as fundamental analysis, candlestick pattern analysis, and other technical indicators. However, the MACD can also provides its own trade signals.
Breaking Down the MACD
If you take a look at the chart below, you’ll see that the MACD is made up of two lines: the MACD line and Signal line. The Signal line is a moving average of the MACD line, thus the MACD moves faster.
The MACD Histogram is the bar graph that oscillates above and below zero. The histogram gives a clear picture of how much the MACD line is above or below signal line. This means that when the histogram is green, or above zero, recent movement is higher.
When the histogram is red, or below zero, this tells us the recent momentum is down. To put it simply, the higher the histogram value is, the more momentum the most recent move has.
MACD Line = 12day EMA – 26day EMA Signal Line = 9day EMA of MACD Line The MACD Histogram is the MACD Line – Signal Line.
Note: EMA is an acronym for Exponential Moving Average
How To Interpret
- When the MACD is above zero it can help to confirm that an uptrend is occuring
- When the MACD is below zero it helps confirm that a downtrend is occuring
- Moves across the zero line on the indicator represent times when the 12day EMA is crossing the 26day EMA.
- When the MACD crosses the zero line from below, a new uptrend may be emerging.
- When the MACD crosses the zero line from above a new downtrend may be emerging.
- Zero line crossovers are useful in deciding when to enter and exit trades
- Signal line crossovers provide better timing, thus they tend to be used more than zero-line crossovers.
- With signal line crossovers, a buy signal occurs when the MACD line crosses above the Signal line.
- A sell signal occurs when the MACD line crosses below the Signal line.
- Bearish divergence occurs when the price is making new highs, but the MACD isn’t following it. This suggests that momentum is slowing down, which can lead to a reversal.
- Bullish divergence occurs when the price is falling to new lows, but the MACD isn’t following it. This suggests that selling pressure is slowing down, which can lead to a reversal.