Types Of Indictaor You Should Know before Investing in cryptos

TYPES OF INDICATORS

we will take a look at different types of indicators used in the field. Each will be expanded upon in great detail later in the book; this section merely serves as an introduction, albeit an important one.

CHART PATTERNS

Many indicators are patterns on charts. Charts, in turn, are just prices moving up and down, which is price action.
Price action that behaves in a predictable way is a pattern, and patterns can be traded upon as a reliable indicator.

LEADING VS. LAGGING

Indicators are either “leading” or “lagging.” Leading indicators predict future price movement while lagging indicators provide signals once price action has already begun or happened. Leading indicators typically react quickly but are less accurate than the alternative, while lagging indicators are more accurate but may be late to the party. Typically, both types of indicators are combined, one (leading) to enter a position and the second (lagging) to confirm the entry.

SUPPORT AND RESISTANCE LEVELS

Support and resistance levels are probably the most commonly known chart-reading tool; you’ve likely heard of them, if not used them. Support and resistance levels indicate concentrated areas of buying or selling. At support levels, downtrends often pause due to a concentration of buyers, while resistance levels often stop uptrends due to a large concentration of sellers. Prices typically bounce between support and resistance levels before breaking out,
either above resistance levels or below support levels. Then, a resistance level often becomes the new support level
(for example, if Bitcoin breaks above resistance at 50k to 53k, 50k may become the new support), or support levels
replace resistance levels. Resistance levels are also sometimes referred to as “ceilings” and support levels as “floors.” Here’s a look at the support and resistance levels on Bitcoin.

As you can see, the price tends to trade sideways along with support and resistance levels. Then, a breakout occurs (as
indicated with the arrows), new support and resistance levels are established, and the cycle restarts. Like all
indicators, it isn’t an exact science; however, support and resistance levels undeniably provide a basis for a large percentage of price movements and breakouts.

VOLUME AND MOMENTUM INDICATORS

Volume indicators provide insight into the number of trades combined with other factors, such as price (volume alone
doesn’t provide much insight as an indicator, hence why they’re usually combined). Momentum indicators, on the
other hand, measure the rate of change. Rate of change, in turn, helps determine strength or weakness in a price
relative to history. So, momentum indicators show how fast prices move up and down, how strong or weak those
movements are, and therefore how likely they are to continue. Popular volume and momentum indicators include the average directional index (ADX), rate of change (ROC), OBV Indicator, and volume RSI.

OSCILLATORS

Oscillators are indicators that vary within an upper limit and a lower limit (for example, between 0 and 100) and
fluctuate within these limits. Oscillators work within very short timeframes and are used to discover overbought (sell)
or oversold (buy) conditions. When the value of an oscillator is closer to an upper limit, it typically means that
the asset is overbought, while the lower limit represents oversold conditions. Popular oscillators include the moving
average convergence/divergence (MACD), relative strength index (RSI), money flow (MFI), and rate of change (ROC).
The MACD, RSI, MFI, ROC, and others will all be thoroughly broken down later, as oscillators rank among the most important and most common types of indicators.

This is the RSI. Note the action in the bottom section, and to the right, you can see the number, followed by a line,
vary within a range of 0 and 100. The number generally falls within the purple range, so between 30 and 70. Anytime it hits above 70, the coin is overbought and will likely pull back. This is a sell signal. A buy signal is indicated when it goes below 30. However, since this RSI rarely falls below 30, one may revise a buy signal to be, say, 40 or below, which is relatively low and thus indicates a strong relative overbought condition.

MOVING AVERAGE INDICATORS

Moving averages are lagging indicators that identify support levels, resistance levels, and trend direction. MAs smooth over data into singular lines. If the line is sloping upwards, it represents an uptrend, and if it is sloping downwards, it represents a downtrend. These lines then function as future support and resistance levels. Moving averages are calculated within a customizable time frame. The most popular time frames are 5, 10, 15, 20, 50, 100, and 200 days (for example, one may say they’re looking at the “50-day moving average”). Different time frames can be used in conjunction; such crossings signify either a bullish or bearish move (bullish if the shorter-term MA crosses above the longer-term MA and bearish if the shorter-term MA falls below the longer-term MA). The two most popular moving averages are the simple moving average (SMA) and the exponential moving average (EMA).

*buy signals are in green thumbs-up symbols, sell signals in red

Here, the 50-day MA and the 200-day MA are shown. Since the 50-day MA is short-term, it is more aligned with the price, while the 200-day MA is “smoother” and portrays more general trends as opposed to smaller-scale movements. Trading on MAs between the first “buy” signal and the first “sell” signal would result in a 2x gain, then reentering at the second “buy” signal and selling at the second “sell” would result in a 5x gain. The resulting gain by trading on all the buy and sell signals would be a 13x, while simply holding would be a 10x. So, an active trader would be roughly 30% more profitable by using moving averages (in this case) than someone simply holding. While this is by no means the rule, it does nicely display the benefit that basic technical analysis and moving averages can bring.

VOLATILITY INDICATORS

Volatility indicators don’t measure or predict trends. Rather, they measure risk, and risk provides a base layer of context about a coin or token (more on volatility is coming in the basic analysis section). Popular volatility indicators are standard deviations, the average true range (ATR), and Bollinger Bands.

BEHAVIORAL TRADING

Technical analysts place a significant degree of importance on the psychological and behavioral aspects of prices. In
this sense, behavioral instincts and psychology are an indicator (in the broader sense of the word) since they (from a technical analyst's perspective) affect prices. For example, Bitcoin probably has strong resistance at $50,000, and much of this resistance may come from the fact that $50,000 is a nice, round number that people place buy orders at. Through situations such as these and others, psychology is a viable part of price action and, hence, analysis. Check out the chart below to see the effect psychology has on trading:

The above Bitcoin chart shows that most support and resistance levels are very near nice, round numbers, such as $30,000, $40,000, and $65,000. This also shows that this isn’t the rule 100% of the time, as with $58,000 and $43,000. However, exceptions only prove the rule, and the rule is that numbers over which psychology holds more sway often influence prices.

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