One question everybody wants to know the answer to when trading, "What is the special indicator that is going to win me every trade???"
Unfortunately there isn't one. Indicators are exactly what their name is, an indication, they point out directions and give signs, but mostly they are lagging or in time with the chart you are watching.
Indicators are best used to support your price analysis/prediction.
I personally use 4 different Indicators:
1. RSI - the old favorite of any experienced trader - the Relative Strength Index - A momentum indicator that tracks price.
This indicator is great for seeing if the price is getting too high (overbought) or too low (oversold).
Overbought is normally around the 80 marker and oversold is normally around the 30 marker.
However, just because the RSI is at 80 does not mean the price is suddenly going to go down. It is just an indicator!
Knowing this fact though, u can use it to find Divergence. Which is simply when the price is moving one direction and the RSI is moving another.
Here's an example:
This divergence clearly marked the recent bottom on Bitcoin.
2. MFI - The Money Flow index
This indicator is very similar to the RSI, except it uses a different calculation using price and volume. I like to think of it as the inflows and outflows of money. It also has a oversold and overbought and can be used to spot divergences.
I use a fancy looking one. You can see here that after the indicator hits that bottom level of 30, the price moves up.
However when the indicator hits overbought conditions at the top, the price is not moving down instantly. This is because the market is in an uptrend, so the bottom signals are good but the top signals do not mean sell immediately.
3. MACD - Moving Average Convergence Divergence - another traders favourite.
This is a good momentum oscillator which shows how much momentum or force is driving behind the market. Also used to find divergences.
You can see where i drew the arrows, the price was moving down strongly so the red histogram drew a big wave, then then there was a smaller wave down after that showing momentum was lacking as the price moved down lower. After that there was a big move upwards.
I am currently taking a trade from this, you can see the long drawn out momentum down is about to end and BTC has also created an Ascending triangle, so i am anticipating a nice move up very soon!
4. Moving Averages - Nearly every trader uses these.
There are two types of Moving averages that i use, the EMA (exponential) and SMA (simple). These are smoothed out price averages of the previous candles. For example a 21 MA is the last 21 candles prices. These are very useful as price will always try to come back to its mean.
You can see here that that BTC is trending very strongly, and that the 13 EMA is a very good point to enter a trade on the daily.
So which indicator is the best? All of them!!
I like to use them all together, and when they all line it gives me more confidence that my analysis is correct.
Right now, the MACD is crossing up, the RSI and MFI have moved down but the price has moved up, and we are trending off the hourly 21 EMA.
$10,500 here we come!!
I hope this was a good basic introduction to some indicators.