| Technical Indicators |- Crypto Academy | S4W2 - Homework Post for @reminiscence01

Hello mates, this is the second week of the 4th season of Crypto Academy and I believe it has been exciting so far. This is my submission for @reminiscence01 homework task on Technical Indicators.

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a) In your own words, explain Technical indicators and why it is a good technical analysis tool.
b) Are technical indicators good for cryptocurrency analysis? Explain your answer.
c) Illustrate how to add indicators on the chart and also how to configure them. (Screenshot needed).

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Understanding what Technical Indicators are

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Traders and technical analyst before taking a position in the market or making an investment decision try to understand the market and price behavior so they make informed decisions that will yield profits at the end of trade. In doing so, they tend to study the charts and employ Technical Indicators for their analysis.

Technical Indicators are simply analytic tools used by traders and analyst to understand the market, spot trends and predict the price behavior of an underlying asset. They are important tools if when understood and used correctly reduces the margin of loss in trade. Technical indicators use previous price behavior and movement to give a graphical representation of the current market which aids traders and analyst to also understand the market and predict future price behavior and movement.

There are varied forms of Technical Indicators and each of them play a specific role in trying to explain price behavior and the market. It is prudent for traders to know and understand how a technical indicator works before using them so as to make accurate investment decisions. Moreover, for best results, traders use more than one techical indicator to make their analysis before taking a position in the market. This is to see if the indicators send the same signals and confirm the signals before trading.

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Technical indicators for Cryptocurrency analysis

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Technical indicators are employed by traders of cryptocurrencies to make analysis before trading. Technical indicators helps traders and analysts to understand the price behavior and movement of the crypto asset in question and can further make informed investment decisions. On a cryptocurrency pair chart, a technical indicator can be used to enable a proper understanding of price behavior, predict future prices and lastly spot trading signals.

In the nutshell, technical indicators are very instrumental when one tries to perform some analysis on cryptocurrencies.

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Adding indicators to a chart

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I will undertake this exercise using the TradingView platform

• Tap the link above to take you to the home page of TradingView

• Click on Chart to launch charts

_{Screenshot from TradingView}

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• Choose a cryptocurrency pair of your choice

_{Screenshot from TradingView}

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• To add an Indicator tap on the Indicator tab (fx)

_{Screenshot from TradingView}

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• Use the serach box to search the Indicator you want to add. I add the Moving Average Indicator

_{Screenshot from TradingView}

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Users are allowed to make modifications or configure the indicators. To do this,

• Tap on the settings icon in the Indicator too box usually at the top left corner of the chart.

_{Screenshot from TradingView}

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• A menu appears where you can make changes to the indicator. Here I change the length from a default 9 to 50.

_{Screenshot from TradingView}

• Tap OK to effect the change

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• The colours can also be change by tapping on the Style tab. Select your preferred colour and Tap OK to effect the change

_{Screenshot from TradingView}

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a) Explain the different categories of Technical indicators and give an example of each category. Also, show the indicators used as an example on your chart. (Screenshot needed).
b) Briefly explain the reason why indicators are not advisable to be used as a standalone tool for technical analysis.
c) Explain how an investor can increase the success rate of a technical indicator signal.

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Categories of Technical Indicators

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• Trend based indicators

Also known as trend-following indicators, they simply aid traders and analyst to know the current market trend and also easily spot a likely trend reversal. This indicator will help determine if the market is in a bullish or bearish trend which will aid traders know if they shoud be buying or selling at the point in the market.
Examples of Trend based indicator are: ADX, Moving Average and Ichimoku Kinko Hyo.

Below is ADX indicator added to a chart.

_{Screenshot from TradingView}

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• Volatility based indicators

These indicators measure the volatility in price of an asset. Because the price of crypto assets are volatile,( i.e they go up and down repeatedly), these indicators help traders to measure how an asset's price has gone up and down within a specific period.
Examples of Volatility based indicators are Average True Range (ATR) and Bollinger bands.

Below is ATR indicator on a chart

_{Screenshot from TradingView}

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• Oscillators

These indicators are used to analyse how far an asset has moved from past price dat to current. Oscillators help traders to know when an asset has been overbought or oversold and make informed investment decisions accordingly.
Examples of Oscillators are: Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and Stochastic.

Below is RSI indicator added to a chart.

_{Screenshot from TradingView}

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Why technical indicators are not to be used as a standalone tool for technical analysis

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It is a complete wrong approach to technical ananlysis when only technical indicators are used for analysis and trade initiated based on those results. One important rule I have learnt these past days is, no single indicator is 100% accurate, therefore for a more accurate analysis, it is good to work with more than one technical indicator and tools for your analysis. This reduces the risk of loss in investments.
Also, it should be noted that each indicator performs a specific function and how it uses the previous price data for computations so using just one indicator to make analysis is a No-No. You are most likely to work with false signals and get things wrong.

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How an investor can increase the success rate of a technical indicator signal

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To increase the success rate of a technical indicator you employ for analysis, undertsanding the dynamics of the indicator puts you ahead. An investor who understands how the technical indicator works and what signals it sends will make good informed investment decisions and is not likely to make errors in trade.
Also, complementing the technical indicator with some other indicators and techcical analytic tools also reduces the risk of loss. Remember there is no single indicator that is 100% accurate.

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Conclusion

Technical indicators are very important tools that aid traders and analyst to understand the market and predit price behavior and moveent. When understood and used properly, traders tend to understand the market, make close to accurate if not accurate predictions and when they trade with this knowledge, margin of loss is reduced.

They should be complemented with other technical tools for the best results.

Thanks for reading and hope this helped you. Credits to @reminiscence01 for this interesting lcture.

Regards

@kayduke.