What is a Technical Analysis?
There are two main types of financial market analysis fundamental and technical. Fundamental analysis focuses on measuring the intrinsic value of an investment product. On the other hand, technical analysis deals with statistical trends, price history, and data charts, etc.
Technical analysis assists investors in projecting the price of an underlying asset such as stocks, commodities, forex, or cryptocurrencies, etc.
Top 5 Technical Indicators for Crypto Investors
Technical indicators are select scales of measurements based on a combination of factors that can affect the price of an asset. Technical indicators allow investors to measure various aspects of a given investment product such as virtual currencies. Here are five fundamental technical analysis indicators that every cryptocurrency investor should utilize:
Relative Strength Index
Relative Strength Index (RSI) is an indicator that is used to determine if a given investment product is oversold or overbought at a given time. The most utilized time unit is set at 14 days, 14 months, or 14 hours, etc. The result of the indicator is often interpreted as an oscillator with a value between 0 and 100.
RSI trend line above 70 indicates overbought and below 30 shows oversold. At the same time, RSI is a momentum indicator therefore when the price increases and uptrend consolidates it means demand is increasing. However, when the trading volume is in decline during the price increase it points towards a selling pressure buildup.
Moving averages help investors to determine trend direction based on historical data. There are two main types of MA namely simple moving average (SMA) and exponential moving average (EMA). SMA selects a price bracket from a predefined period to calculate its mean.
On the other hand, EMA assign more value to a recent price for defined time duration. MA is a lagging indicator meaning the greater the time bracket the bigger is time lag.
Moving Average Convergence Divergence
Moving Average Convergence Divergence (MACD) is correlation between two types of MAs. The first line is MACD line and the second one is signal line. MACD line is difference between 26 EMA and 12 EMA and the signal line is 9-day EMA of MACD line.
Investors tend to purchase a given asset when its MACD line is trending upwards in comparison to signal line and vice versa. In some cases, MACD is combined with RSI to measure the price momentum but on account of different factors. Furthermore, MACD is also used to determine the trend reversal.
Stochastic RSI is a momentum oscillator that is used to determine if an asset is overbought or oversold. It is a type of RSI that emphasizes on RSI value rather than spot prices of a given asset class.
This indicator can range 0-1 or 0-100. When the Stochastic RSI range falls above 0.8 it means that the asset in question is overbought and when it falls below 0.2 it means that the asset is oversold. However, it does not interpret trend reversals near optimum ranges.
Bollinger Bands are used to determine the price volatility and demand for an investment product. They have three lines. The middle one is an SMA and the lower lines and upper lines are respected standard deviations of the middle band. When the price line is closer to the upper band it means that the asset has more overbought factors activated.
On the contrary, when it is nearing the lower band the investment product has a bigger oversold inclination. Under normal circumstances, the price range stays within the lower and upper band range. However, on rare occasions, it may break out that point towards big price shifts.
Professional investors are well-versed in technical analysis and indicators. Technical indicators can assist the investor with refining their trading strategy by decreasing associated risks and increasing their profit potential.