10.1 – Indicators
Indicators are independent trading systems introduced to the world by successful traders. Indicators are built on preset logic, using which traders can supplement their technical study (candlesticks, volumes, S&R) to arrive at a trading decision. Indicators help buy, sell, confirm trends, and sometimes predict trends.
We will learn more in the video.
In the following video, we will learn about moving averages.
We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Indicators are independent trading systems developed and introduced by successful traders.
- Indicators are leading or lagging. Leading indicators signal the possible occurrence of an event. Lagging indicators, on the other hand, confirms an ongoing trend.
- RSI is a momentum oscillator that oscillates between 0 and 100 levels.
- A value between 0 and 30 is considered oversold. Hence the trader should look at buying opportunities.
- A value between 70 and 100 is considered overbought. Hence the trader should look at selling opportunities.
- If the RSI value is fixed in a region for a prolonged period, it indicates excess momentum. Hence, the trader can consider initiating a trade in the same direction instead of taking a reversed position.
- A MACD is a trend following system.
- MACD consists of a 12 Day, 26 days EMA.
- MACD line is 12d EMA – 26d EMA.
- The signal line is the nine days SMA of the MACD line.
- A crossover strategy can be applied between the MACD Line and the signal line.
- The Bollinger band captures the volatility. It has a 20-day average, a +2 SD, and a -2 SD.
- One can short when the current price is at +2SD, expecting that the price reverts to the average.
- One can go long when the current price is at -2SD, expecting the price to revert to the average.
- BB works well in a sideways market. The BB’s envelope expands in a trending market and generates many false signals.
- Indicators are good to know, but they should not be treated as a single decision-making source.