5 Ways to Utilize Indicators to Analyze Asset Price Movements with Technical Analysis

Important Points

By effectively utilizing technical analysis indicators, you can quickly grasp price movement patterns and trading opportunities in the market. RSI, moving averages, MACD, Stochastic RSI, and Bollinger Bands are mainstream tools widely used among market participants. On the other hand, rather than relying solely on these indicators, combining multiple methods such as fundamental analysis allows for more accurate judgments.

Introduction - Why Technical Analysis is Important

Chart analysis tools are essential items that experienced traders use regularly. Which tool is suitable for you depends on the trader's style and the focus of their analysis. There are various purposes, such as those who pay attention to short-term momentum, those who want to filter out market noise, and those who want to track volatility changes.

There may be differing opinions among experts about what the most effective indicators are. However, five indicators such as RSI, moving averages, MACD, Stochastic RSI, and Bollinger Bands are overwhelmingly popular among professionals and beginners alike. In this article, we will explain in detail how each of these indicators works and how to use them practically.

1. Bollinger Bands - Determining Volatility and Overbought/Oversold Levels

Bollinger Bands are indicators that visualize the level of market volatility. They are usually composed of three lines, where the closer the price approaches the upper limit, the more overbought the condition becomes, and the closer it approaches the lower limit, the stronger the tendency to be oversold. In many cases, asset prices fluctuate within the range of the three bands, but in extreme market conditions, they can also break out above or below.

Bollinger Bands themselves are not trading signals, but they suggest that the market is in an extremely overheated or oversold state. An important concept is “squeeze.” This refers to a low volatility period where all bands are very close together, and it is seen as a precursor to a rapid increase in volatility. Conversely, if the bands are widely spread, there may be a possibility of decreasing volatility in the future.

2. RSI (Relative Strength Index) - Identifying Overbought and Oversold Conditions from Momentum

RSI is a representative indicator that measures momentum and is used to determine whether an asset is in an overbought or oversold condition. It is calculated from the magnitude of recent price fluctuations, with the standard period typically set to 14 days (daily chart) or 14 hours (hourly chart).

The RSI, which is a type of oscillator, fluctuates on a scale of 0 to 100. Generally, values above 70 are interpreted as overbought, while values below 30 are seen as oversold. The emergence of such extreme values suggests that a trend reversal or correction may occur soon. However, it is dangerous to treat these values solely as mechanical buy and sell signals. Like other analytical methods, the RSI can also produce false or misleading signals, so it is essential to always consider multiple factors before making entry decisions.

The key point to understand about the principle of momentum indicators is that an increase in momentum during a price rise indicates an increase in buyer participation, while a decrease in momentum during an uptrend signifies an impending shift in control to sellers.

3. Moving Average (MA) - Confirmation of Trend Direction and Utilization as a Lagging Indicator

The moving average is used to smooth out price movements on the chart and emphasize the direction of the market. It is classified as a lagging indicator because it is based on past price data.

The two most common types are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). The Simple Moving Average plots the average price over a specified period (e.g., 10 days), while the Exponential Moving Average plots the average value calculated by giving greater weight to more recent data. This makes the EMA respond more sensitively to recent price movement changes.

One important characteristic is that the longer the period, the greater the lag. Therefore, the 200-day moving average reacts more slowly to recent market fluctuations compared to the 50-day moving average. Traders often determine the current market trend based on the relationship between the price and the moving average; for example, if the asset price consistently remains above the 200-day moving average, it is considered to be in a bullish market.

It is also common to use the crossover of moving averages as a trading signal. The phenomenon where the short-term line crosses the long-term line from above to below functions as a sell signal, indicating that the short-term average price has fallen below the long-term average, suggesting that the end of an upward trend may be near.

4. MACD (Moving Average Convergence Divergence) - Reading momentum from the divergence of two moving averages

The MACD is a tool for assessing the momentum of an asset by visualizing the relationship between two different periods of exponential moving averages. The MACD line is calculated by subtracting EMA26 from EMA12, and this is displayed alongside the signal line, which is EMA9. Many chart platforms also feature a histogram that shows the divergence between the MACD line and the signal line.

The divergence that occurs between the MACD and the price provides important insights into the current trend strength. For example, if the MACD is moving at a level below the previous high (lower high) while the price is above the previous high (higher high), the possibility of a trend reversal increases. In this situation, although the market momentum is weakening, the price is still rising, suggesting that a correction or reversal is imminent.

It is also worth paying attention to the crossover points of the MACD line and the signal line. When the MACD crosses the signal line from above to below, it indicates a sell signal, while crossing from below to above suggests a buy signal.

Many traders use MACD in combination with RSI. Both measure momentum, but because they use different methodologies, combining them allows for more accurate market judgments.

5. Stochastic RSI (StochRSI) - Extracts more sensitive signals from the derivative version of RSI

Stochastic RSI is a derived indicator that applies the stochastic formula to the RSI values. It generates more sensitive buy and sell signals as it measures the momentum of the RSI itself, rather than the values of the normal RSI. The Stochastic RSI fluctuates within a range of 0 to 1 (or 0 to 100).

Due to its high responsiveness and sensitivity, many trading signals are generated, but their interpretation tends to become complicated. Generally, a value above 0.8 is considered overbought, while a value below 0.2 is considered oversold. A value of 0 means that the RSI is at the lowest point of the measurement period (the default setting is usually 14 periods), while a value of 1 means it is at the highest point.

It is important to note that even if the Stochastic RSI indicates overbought or oversold conditions, it does not necessarily mean that a price reversal will occur. This merely indicates that the RSI value is at an extreme level during the measurement period. Because it is more sensitive than the RSI, it tends to increase noise and false signals.

Practical Use of Indicators

Combining multiple indicators can enhance the reliability of judgments compared to relying on a single indicator. For example, if the Bollinger Bands are approaching the upper limit and the RSI is above 70 indicating overbought conditions, the credibility of that sell signal increases.

However, it is important to recognize that no indicator is perfect. The data is presented in numerical form, but its interpretation is inherently subjective. What may be a clear trading opportunity for one trader could just be market noise for another. It is essential to always take a step back and verify whether personal biases are influencing your judgment.

The Importance of Learning and Practice

To truly master technical analysis indicators, experience through practice is more important than theoretical learning. Experiencing the characteristics and limitations of each indicator through virtual trading in a demo account or trading with small amounts will be the most effective learning method.

Market analysis methods are diverse, but technical analysis indicators reveal their true value when combined with fundamental analysis and other analytical methods. By examining the market from multiple analytical perspectives, more robust trading decisions can be made.