An Introduction to Technical Indicators — KTX Educational Series 📖
Introduction 🧵
When looking at starting a career or hobby in trading, many people can get supremely overwhelmed. There are numerous tools, courses, analytics, and more that can cause your eyes to cross! On top of that, there are thousands of different assets to trade and millions of different ways.
However, there are some ways for both new traders and seasoned veterans to gain a different perspective on their charts and potentially increase profitability!
In this article, we’re going to dive into some indicators, what they look like on charts and some ways they can be used during trading! These will all be useful tools to have in your arsenal so get your pen and notepad and let’s go!
What are Indicators? 🧰
Well if you want the actual definition: “Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis.”
That’s a long-winded way of saying that it helps guide traders in understanding where markets may go or help define conditions that the trader may think as favorable for their trading style. It can also help you look back on prior price action to potentially discern movements or patterns so you can act on those movements in the future.
Types of Indicators
There are two basic types of indicators:
- Oscillators: These are technical indicators that move between a local low and high point that are normally shown underneath a price chart.
Example: MACD or RSI - Overlays: These technical indicators are laid over the movement of price on a chart. Below examples of Bollinger Bands and the Ichimoku Cloud will illustrate this point.
Example: Moving Averages or Bollinger Bands
Trading with advanced chart tools on KTX.Finance
On the KTX trading portal, you can find almost every indicator you could imagine by clicking the indicators button that is to the right of the timeframes.
The below image shows what this looks like when we search for the Ichimoku cloud.
Now that you have a background knowledge on what a technical indicator is, we’ll show off some of the most common ones to give you a headstart on your journey!
1️⃣Relative Strength Index
First on our list is the Relative Strength Index or “RSI”.
The RSI is an oscillator that is used to help identify momentum shifts in an asset. This is useful when trying to decide if an asset is running out of steam and is overbought/oversold. It can also be useful in indicating assets that may be primed for a reversal or corrective movement in price.
As you can see in the above screenshot from the KTX trading portal, the RSI is overlaid at the bottom in the purple box.
- Overbought — When the purple line moves over the top of the box, the asset is considered overbought
- Oversold — When the purple line moves under the box, the asset is considered oversold
Now what may be confusing at first is that an asset can be overbought/oversold for long periods of time. But why is this?
Well because RSI is meant to be used in context with the overall trend of the asset. If the asset is in a bull market (like ETH in 2021) it could’ve been “overbought” for a long time. So if you were to see that signal, keeping “the trend is your friend” mantra in your head, you would lean towards that being a false signal.
So what is the RSI useful for if it can trick you? It can help you validate your own beliefs on the trend or potential trend reversal, point to possible overbought and oversold assets, and it can even help scalpers (short term traders) with buy/sell signals.
Now let’s get into something a bit more thorough…
2️⃣Ichimoku Cloud
The Ichimoku cloud is an all in one type of indicator that shows potential support and resistance levels, as well as momentum and trend direction. It does this by taking many different moving averages and creating the “cloud”.
Moving averages are simply a security’s average closing price over the last specified number of days.
Ichimoku translates to “one look” and that’s the cloud’s strength. It’s an easy way to check out a chart and know in one glance trends and where the potential momentum may be.
When price is above the cloud then the trend is up, and when price is below then the trend is down.
But what happens when price is trading inside of the cloud?
That’s usually considered a trendless area or a transitioning period for price which is where knowledge of the end-to-end trading setup comes in handy.
- End-to-End Trading — This is where price will enter the body of the cloud and bounce to the other side.
- For example: Price will enter the cloud and touch the lower boundary of the inside of the cloud and move to the upper boundary all while remaining inside of the cloud.
Now take a look at the above picture, see the cloud structure going from green to red? That’s how it helps predict and show the trend/momentum of the asset. When price is trading above a green cloud, the trend is moving upwards while the opposite is true for the red cloud.
Ichimoku is usually best used in conjunction with other indicators like RSI to help give extra confluence to your thoughts on the asset’s momentum/trend.
3️⃣Bollinger Bands
Finally we come to Bollinger Bands!
Bollinger Bands were created by a certain John Bollinger, who you may see pop up on CT every now and again as he talks about Bitcoin on occasion. He created the Bollinger Bands as a way of giving traders a higher probability of seeing when an asset is overbought or oversold, much like an RSI.
The Bollinger Bands are also like the Ichimoku Cloud in that it gives you a clear idea of the trend based off of one look at a chart. The bands can contract and narrow which can indicate a period of low volatility that usually precedes a volatile move.
But unlike the RSI and Ichimoku, Bollinger Bands can also expand which can be a sign of a decrease in volatility and is used as an exit signal for some traders.
As you can see from the above chart, price can sometimes escape the bounds of these bands. This is where traders can make mistakes! Just because price has moved beyond the bounds of the bands, that does not mean that it’s a “breakout” trade like most would think.
In fact, what ends up happening is the opposite! Price tends to trend back inside the bands, but how long that takes to occur is unknown. But as you can see, ETH does a great job of respecting the bands.
The orange line down the middle is used as a median and can sometimes act as a support or resistance depending on the direction of the current trend.
In Summary
- RSI (Relative Strength Index) is a tool used to help identify momentum shifts in an asset and gauge if an asset is overbought/oversold
- Ichimoku Cloud is a indicator used to show potential support and resistance levels, as well as momentum and trend direction.
- Bollinger Bands are a tool used to give traders a higher probability of seeing when an asset is overbought or oversold.
Our KTX trading portal has included all the basic indicators that most traders use, but there is something in the pipeline for the truly advanced traders…
Wrap Up
Hopefully after reading this article you’ve managed to pick up some new strategies and tactics to help aid your trading!
Indicators are a great tool to offer confluence to your trades and give you more confidence that you’ve caught the right trend.
Luckily for you, we offer tons of different indicators for you to play around with and try out over at https://app.ktx.finance/#/trade!
We currently have a rewards program on Mantle for any early traders that come over and use our platform with up to 25,000 $MNT tokens up for grabs! All you have to do is trade like normal and earn trading points!
Connect with KTX.Finance to stay updated always!
