Charles Dow, who stood at the forefront of technical analysis, was firmly convinced that price dynamics of an asset clearly follow trends and have their own explanations. And if one analyzes the indicators of supply and demand or past events and forecasts for the future, then price behavior can be predicted. To maximize the accuracy of forecasts, traders are helped by indicators of technical analysis, quite a few of which appeared during the development of financial markets. Let us dwell on the most important and interesting ones.
The volume indicator is a technical analysis tool that allows one to track the number of trades made by traders over a certain time interval. The green and red bars on the graph above are indicators of the volume of transactions. The red signals a decrease in volume, the green ones indicate growth.
By analyzing the volume of transactions against the background of price movements, one can confirm the strength of the trend or reveal its weakness and predict price turns. If prices rise and the trading volume grows, we observe a bullish trend. Growth in the volume of trading in the event of a decline in prices suggests a bearish trend.
Keep in mind a number of simple rules:
The volume indicator has a tendency for strong leaps, which, at times, can distort the true picture of the market.
The higher the volume of transactions, the higher the rate dynamics.
A confident trend is confirmed by unidirectional growth in volume and price. If prices rise, we buy assets, and vice versa.
A decrease in volume may signal a trend reversal.
A decrease in trading volume in case of a breakdown may indicate a false market signal. The grow ing volume in this case, on the contrary, confirms the trend.
This is an auxiliary indicator analyzing the high and low points of cryptocurrency rates, which also allows determining the correct entry points on the market. An advantage of the indicator is that it neutralizes noises that can distort the forecast of the trend behavior. Minor fluctuations are simply not taken into account, as the lines connect the higher and lower points of the price chart directly. The Zigzag shows global market movements, but it only records these changes in the past without giving forecasts on the behavior of prices in the future.
The indicator parameters are adjusted proceeding from the current situation on the market and require testing. It is necessary to get used to the fact that Zigzag signals may be late, and an inexperienced trader can interpret the situation incorrectly.
RSI (Relative Strength Index)
The RSI, or relative strength index, shows the greatest efficiency in terms of lateral trends. The RSI can give incorrect data under active rate dynamics. Such indicators of technical analysis are called oscillators, and they must be applied with caution. The algorithms of the indicator analyze price changes and allow evaluating the overbought or oversold nature of an asset, and, therefore, predicting the occurrence of bullish or bearish trends.
Visually, the RSI is represented as a broken line with values from 0 to 100. The RSI index below 30 indicates oversold values, while above 30 it indicates overbought values. The latter will lead to a price reduction eventually.