Trading101: How to read candlestick charts (Volume 3)
Hello everyone and welcome to volume 3 of "How to read candlestick charts". In this article, we will show you how to correctly choose your technical indicators. Because often, when we are beginners, we don't know which indicator to choose or even worse, we try to put as many indicators as possible on his chart until it becomes a Christmas tree.
What you need to know is that indicators are mainly used for one thing: to help us make decisions. Some indicators provide more information than others. A single indicator should not make you make a decision.
For most, if not all, of the indicators, they lag behind price because they are based on price. The best indicator to make a decision is simply the price. As we saw in the first article, it can be interesting to sell when the price hits resistance and buy when it hits support. However, in this article, we will go further and study some technical indicators. It is useless to use a lot of indicators to reassure yourself. Remember that if you use too many indicators, they will give you opposite signals or they will give you the same signals. In trading as in cooking, the simplest recipes are often the best. Technical indicators can be classified into 4 categories.
The first category is: trend indicators
There are several indicators that allow you to find the trend of cryptocurrencies. The best known of course is the moving average, which we introduced in Volume 2. The moving average helps in decision-making. The theoretical strategy is that as soon as the price goes above the moving average, we buy and as soon as the price goes below, we sell. Of course, doing just that does not work, it works when the price follows the trend but when the price no longer follows the trend, it does not work.
The second: momentum indicators
The best known is the RSI, there is also the stochastic indicator, the MACD. These are all indicators, some are bounded and others are not. The momentum indicators allow us to refine our buying and selling timing. For example, if we take the example of the first indicator, the RSI, the theoretical objective is to buy when the RSI is low and when the RSI is high. We will create an article dedicated to the RSI soon. Don't try to follow the strategy we just mentioned because it won't work as is, we are just simplifying the concept of an indicator.
Third: volume indicators
Volume indicators are not going to tell you an optimal buy or sell price or the direction of the trend, at least not directly. These indicators will reinforce price movements. As soon as we see an increase in volume, then we can deduce that we have an increase in interest from market players. As soon as we have a decrease, then we are facing disinterest. Beware, an increase in volume does not necessarily mean that the price will go up. The opposite is also true: a decrease in volume does not necessarily mean a decrease in price.
Fourth: indicators related to volatility
The volatility measure simply indicates the volatility, as the name suggests, on different assets. The main function of these indicators is to obtain average volatility. One of the best-known indicators is the Bollinger Bands. One of the best-known indicators is the Bollinger Bands. When the Bollinger Bands move apart, we have an increase in volatility, if the Bollinger Bands move together, we have a decrease in volatility.
The indicators we recommend starting with
Bollinger bands in logarithmic
The moving average 200
The moving average 50
Moving averages belong to the category "trend" but also "momentum" because it is necessary to distinguish the temporality: short-term or long-term. When the two moving averages mentioned above get closer, it means that the price is consolidating and that we are facing a weak momentum. The momentum can be measured by the gap between the two moving averages. It is also possible to take only one moving average to interpret the momentum. For example, when the price moves "too far" from the 50-moving average, then it becomes "too dangerous" to take a position.
How do you know if an indicator is working?
An indicator, as explained above, is not used alone. Either you look directly at the price, or you use complementary indicators. However, it is possible to isolate a single indicator. Let's say you have found additional indicators, such as the moving average, Bollinger bands and RSI. What you want to do is to know if this or that indicator works or not. Each indicator has some cases that allow it to work and others that do not. This is why we use several indicators and complementary indicators. Because when you find yourself in a market configuration where one is doing a little better than the other, the one that is doing better will make up for the other's shortcomings. Moving averages for example, as explained above, work very well when the market is following a trend. But when we are not on trend, these indicators do not work. So how do we know if we are trending or not? Well, this is where we will use a complementary indicator, the Bollinger Bands. Well, this is where we are going to use a complementary indicator, the Bollinger Bands that will allow us to know it. If the Bollinger Bands tell us that we are in a trend, then we can work with the moving averages, if the Bollinger Bands tell us the opposite, then we will know that the moving averages are less relevant.
Obviously, there are other ways of interpreting this. Everything we explain in this article is the basis. When using indicators, use complementary indicators. There is no single trading method that works. It's up to you to find one that fits your personality, the asset you are trading, the time unit, etc... By using the 4 indicators presented in this article you will have 1 indicator of each category and therefore a complete analysis. Each analyst uses different indicators that all work well, but if you look closely, everyone who has a method that works well has one indicator per category. An indicator can belong to several categories.
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Disclaimer: This article is for educational purposes only and is not intended as investment advice.
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