Technical Indicators

Table of Content

What Are Technical Indicators?

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.

By analyzing historical data, technical analysts use indicators to predict future price movements.

Note that at AlgoStorm.com, we provide our own premium proven-to-work technical indicators. Those indicators have been expertly crafted by our team to simplify trading and guide investors in becoming consistently profitable. Learn more about them at: https://algostorm.com/trading-system/

Impotant Notes To Remember:

  • Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis.
  • Technical analysts or chartists look for technical indicators in historical asset data to judge entry and exit points for trades.
  • There are several technical indicators that fall broadly into two main categories: overlays and oscillators.

How Technical Indicators Work?

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.

Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic value based on financial or economic data, technical analysts focus on patterns of price movements, trading signals, and various other analytical charting tools to evaluate a security’s strength or weakness.

Technical analysis can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities.

Technical indicators, also known as “technicals,” are focused on historical trading data, such as price, volume, and open interest, rather than the fundamentals of a business, such as earnings, revenue, or profit margins.

Technical indicators are commonly used by active traders, since they’re designed to analyze short-term price movements, but long-term investors may also use technical indicators to identify entry and exit points.


Types of Technical Indicators

There are two basic types of technical indicators:

  • Overlays: Technical indicators that use the same scale as prices are plotted over the top of the prices on a stock chart. Examples include moving averages and Bollinger Bands®.

  • Oscillators: Technical indicators that oscillate between a local minimum and maximum are plotted above or below a price chart. Examples include the stochastic oscillator, MACD, or RSI.

Traders often use many different technical indicators when analyzing a security. With thousands of different options, traders must choose the indicators that work best for them and familiarize themselves with how they work.

Traders may also combine technical indicators with more subjective forms of technical analysis, such as looking at chart patterns, to come up with trade ideas. Technical indicators can also be incorporated into automated trading systems, given their quantitative nature.


Groups Of Technical Indicators

Technical indicators can be divided into 4 unique groups, with individual philosophies into how prices can be forecasted. These 4 groups are trending, volatility, momentum and volume indicators. Every one of these groups has in common the goal to uncover insight into the future prices of the assets they’re trading. There are also special group of indicators that focuses solely on the order books. In Cryptocurrency trading, we also have on-chain related indicators.

Trend Indicators

Trend indicators boil down sporadic and varying candle prices into a single uniform line. The idea is to pinpoint and follow trends to foresee when they might reverse or range, and then base a trading decision off of that.

The vast majority of indicators that are considered trend indicators are moving averages. These are calculations that generate price averages for the last “X” periods to identify a trend line.

The philosophy behind trend lines is that prices may go up and down across different candles, but if you calculate an average, you can see whether the aggregate of all candles indicates an upward trend (increase in price) or a downward trend (decline in price). With this insight, you can also figure out when an asset will reverse in trend, or when it’s ranging (moving sideways) since most of these indicators lose money when the price ranges.

  • Moving Averages
  • SuperTrend
  • Parabolic SAR
  • Ichimoku Kinkō Hyō

Our team uses the FWD and VTD premium indicators for identifying the trend. You can access this indicator as part of your membership at AlgoStorm.com.

FWD Indicator Illustration:
FWD Indicator

Momentum Indicators

The momentum measures the speed and strength of the price movement. It compares the current closing price with this one a certain amount of periods ago. Momentum indicators´ key levels are 100 or 0 (depending on the indicator), when the levels rise above 100, it means that the current price is above the price “X” periods ago. Then, if the current level is 102 and the previous one was 101, it suggests that the price is moving quicker upwards than before.

Momentum indicators on their own don’t provide much information about future price movements since they mainly tell us if the price is trending up or down and if it is considered overbought or oversold based on past price ranges. They are commonly used along with other types of indicators such as moving averages to give stronger signals.

Common Momentum Indicators Include:

  • Average Directional Index (ADX)
  • Moving Average Convergence Divergence (MACD)
  • Relative Strength Index (RSI)
  • Stochastic Oscillator (Stoch)
  • Stochastic Relative Strength Index (Stoch RSI)
  • True Strength Indicator (TSI)

For momentum, our team uses the LMD premium indicator. You can access this indicator by joining us at AlgoStorm.com

LMD Indicator

Volatility Indicators

Volatility indicators measure the volatility of the price, indicating when a market is more volatile and more volume is entering in it. Then, when the price is more volatile, it has fewer ranging possibilities, thereby forcing the price to start trending and favoring longer positions.

Traders love volatility. It moves the price creating trading opportunities and is usually accompanied by more volume. Markets with little volatility are considered boring and not profitable, as well as very possibly more illiquid.

Common Volatility Indicators Include:

  • Average True Range (ATR)
  • Bollinger Bands (BB)
  • Donchian Channel
  • Keltner Channel

Our team uses the FWD indicator to measure both trend and volatility. Learn more about it by visiting our trading system at: https://algostorm.com/trading-system/

FWD Indicator

Volume Indicators

The volume indicates the number of contracts traded for a certain asset in a period of time. These ones will help you measure the strength of a trend and its direction. Traders like volume since, similarly to volatility, it creates trading opportunities. On the other hand, they try to avoid low volume periods since the price might be ranging which may lead to either low profitable trades or negative ones.

In forex and stock markets the period of trading is very well defined due to most of the traders operate at the beginning of the European, American and Asian market, that is, when the volume is higher, the market is trending more and there is more liquidity.

Common Volume Indicators Include:

  • Chaikin Money Flow (CMF)
  • Cumulative Volume Delta (CVD)
  • Klinger Oscillator
  • Money Flow Index (MFI)
  • On-Balance Volume (OBV)
  • Volume Profile
  • Volume Weighted Average Price (VWAP)

For volume, our team uses the volume profile, the LMD premium indicator, and the volume-based VTD indicator to analyze properly the flow of volume. You can access our premium indicators by joining us at AlgoStorm.com

VTD Indicator Illustration:
VTD Indicator

Order Book & Depth Of Market (DOM)

Depth of market (DOM) is a measure of the supply and demand for liquid, tradeable assets. It is based on the number of open buy and sell orders for a given asset such as a stock or futures contract. The greater the quantity of those orders, the deeper or more liquid, the market is considered to be.

Depth of market data is also known as the order book since it consists of a list of pending orders for a security or currency. The data in the book is used to determine which transactions can be processed. DOM data is available from most online brokers for free or for a small fee.

Understanding DOM

By measuring real-time supply and demand, market depth is used by traders to assess the likely direction of an asset’s price. It is also used to gauge the number of shares of the asset that can be bought without causing its price to appreciate.

If a stock is extremely liquid, it has a large number of both buyers and sellers. A buyer can purchase a large block of shares without causing a substantial stock price movement.

However, if a stock is not particularly liquid, it doesn’t trade as constantly. Purchasing a block of shares may have a noticeable impact on the stock’s price.

Depth of market is typically displayed as an electronic list of outstanding buy and sell orders, organized by price level and updated in real-time to reflect current activity. A matching engine pairs up compatible trades for completion.

Most online brokers offer some form of DOM display. This allows users to see a full list of buy and sell orders pending execution, along with the size of the trade, rather than just the best options available.

Important Notes To Remember:

  • Depth of market (DOM) is an indicator of the current interest in a stock or other asset.
  • It can be read as a signal of the likely direction of a stock’s price.
  • It is used to judge the optimal time to buy or sell an asset.

Components Of An Order Book

The outline of an order book can vary between the recorded securities. However, it usually consists of several components, as listed below:

Order Book Indicator

  • Buyer’s side and seller’s side: An order book is a market price recorder. Therefore, it includes a buyer’s side and a seller’s side – the two major participants in a market.

  • Bid and ask: Instead of using a buyer’s side and a seller’s side, some order books use the terms “bid” and “ask.” Buyers are the ones who “bid” for a certain number of shares at a specified price, and sellers “ask” for a specific price for their shares. As a rule of thumb, the buyer’s side (bid) is on the left, and the seller’s side (ask) is on the right, colored green and red, respectively.

  • Prices: An order book records the value interest of both sides. The number in the buyer’s or seller’s columns represents the amount they are bidding or asking for and at what price.

  • Total: The total columns are the cumulative amounts of the specific security sold from different prices.

  • Visual Demonstration: Normally, an order book comes with a table of numbers consisting of prices and total amounts from two sides. To better represent the relationship between buyers and sellers, most of the order books come with a visual demonstration as well. It can be in the form of a line chart or others. In this way, the reader can quickly achieve an overall understanding of market demand and supply.

How to Use DOM Data

Depth of market data helps traders see where the price of a security may be heading in the near future as orders are filled, updated, or canceled. A trader might use market depth data to understand the bid-ask spread for a stock, along with its current volume.

Stocks with a strong depth of market tend to be popular large-cap companies. They usually have strong volumes and are quite liquid, allowing traders to place large orders without significantly affecting their market prices.

Securities with poor depth of market tend to be more obscure companies with smaller market capitalizations. The prices of their stocks are likely to move if a single trader places a large buy or sell order.

The most popular stocks or Crypto tend to have a greater depth of market than the stocks of lesser-known companies.

Being able to view the depth of market information for a particular security in real-time allows traders to profit from short-term price volatility.

For example, when a company launches its initial public offering (IPO), traders can watch its DOM in real-time, waiting for the opportunity to buy or sell shares when the price reaches the right level of demand.

Example of DOM:

Say a trader is tracking the DOM of Stock A. The shares might currently be trading at $1.00. But there are 250 offers at $1.05, 250 at $1.08, 125 at $1.10, and 100 at $1.12. Meanwhile, there are 50 offers at $0.98, 40 offers at $0.95, and 10 each at $0.93 and $0.92.

Seeing this trend, the trader might determine that Stock A is going higher. Armed with that knowledge, the trader can decide whether this is the right time to jump in and buy or sell the stock.

In Conclusion:

An order book is a useful tool for traders. Learning how to read it can help traders tremendously in understanding the market they’re currently trading in or about to enter. Studying the order book in the long term enables traders to know whether or not the market of a security is healthy. The more information traders can learn about the market, the more informed decisions they can make about their orders.

On-Chain Metrics

What is a Blockchain?

Even though the breakthrough of Blockchain, in popular culture, is often accredited to Satoshi Nakamoto for his revolutionary invention of Bitcoin, the original minds behind the idea of a cryptographically secured chain happen to be Stuart Haber and W. Scott Stornetta.

The two academic researchers proposed in 1991 the development and implementation of a timestamp-based digital tool that was intended to make valuable documents published on the web both permanent and tamper-proof. A «proof protocol» would support and verify that a document existed at a certain point of time in a certain definite version.

Today’s most popular Blockchain protocols contain many of the original characteristics. In layman terms, a public Blockchain might be defined as a digital chain consisting of blocks where each block contains tranches of valuable information and a unique alphanumeric code known as a hash.

A block is not only marked with its own unique hash but also with the hash of the previous block – a system through which Blockchains become almost impossible to be hacked once they have reached a certain length. Conceptually, a Blockchain is defined as a digital public ledger consisting of records distributed over a wide network of nodes where a single node (i.e. computer system), person, or organization is not authorized to make changes or control the flow of information unilaterally.

Blockchain technology lays the foundation for a potential shift from centralized financial and information systems to decentralized public networks that enable a «trustless» transfer of value and information.

What Is On-Chain Data?

On-chain data includes the information of all occurred transactions on a certain Blockchain network – or put differently – all information written on the blocks of a Blockchain.

In case of a public Blockchain, this information is available for everyone to see. The data can be broadly classified into three distinct categories:

  • Transaction Data: Like the sending and receiving address, transferred amount, remaining value for a certain address.
  • Block Data: Like timestamps, miner fees, rewards.
  • Smart Contract Code: Like the codified business logic on a Blockchain.

On-Chain vs. Off-Chain Data

Off-chain transactions are not (or at least not fully) executed and recorded on the Blockchain. This is in sharp contrast with on-chain transactions where the transfer of value occurs on the Blockchain network and therefore gets recorded.

In a more traditional sense, the two kinds of transactions can be understood as «on-record» and «off-record» practices: Imagine a scenario where you are required to transfer a sum of money to X’s account. You can discharge your liability by following the traditional routine of transferring the value to X’s bank account via your bank account or some third-party vendor, like Paypal. Alternatively, you might prefer to settle the debt through other practices such as funding coupons and sharing the code with X or simply exchanging your PayPal password with X. While in the first case the bank or third-party provider typically charges its customers a fee for their services, the alternative practices permit individuals to dodge transaction costs.

Similarly, in a Blockchain ecosystem, off-chain transactions can occur in various ways. The simplest off-chain settlement involves the exchange of private keys through which full access to the owner’s funds are granted.

Now, this prompts us to ponder over possible reasons for a party to opt for an off-chain transaction over an on-chain transaction. One key factor concerns the high transaction costs for exchanging cryptocurrencies such as Bitcoin. Especially for small transactions the miner fee might exceed the amount to be transferred, consequently making such a transaction economically unfeasible when executed on-chain.

Performance is another crucial factor: On-chain transactions are not only limited in terms of speed but also regarding size. As a result, it can become very expensive to store a larger amount of data on-chain. Moreover, certain actors on public Blockchains may favor off-chain over on-chain transactions due to privacy concerns.

On-Chain Analysis & Metrics

On-chain analysis is an emerging field aiming at extracting and scrutinizing the plethora of available data about public Blockchain transactions to facilitate a better decision making. Its tools and techniques are often applied for trading and investment purposes.

One of the first popular on-chain metrics was Coin Days Destroyed, introduced in 2011 to track the activity on the Bitcoin network. Coin Metrics’ launch of the Network Value-to-Transaction (NVT) ratio in 2017, a method to value Bitcoin taking into account both its market capitalization and actual usage in terms of network transactions, led to a broader interest for on-chain analysis techniques.

Today, a vast number of similar and often more sophisticated on-chain indicators exist. In the next section of this article I will present different on-chain data and analytics tools that let users play around with and learn more about on-chain indicators.

Note: Here at AlgoStorm.com, we use Santiment (an on-chain analysis tools provider) to analyze the Crypto markets.


Common Mistakes When Using Indicators

Mistake 1 – Using too Many Indicators

While one indicator by itself might not be sufficient, eight is definitely too many. Actually anything over three-to-four indicators is probably too many.

Many novice traders add an indicator each time they have a losing trade, and end up with information overload. When three indicators saying buy are opposed by three sell signals, the result is “paralysis by analysis.” Avoid making your charts look too complex.

The best traders can often describe their systems so anyone can understand them. Simplicity improves your clarity and decision making.

Mistake 2 – Relying On A Single Indicator

There is no simple path to success in trading. When looking at a price chart, it is easy for new traders to become overwhelmed by all the seemingly random wiggles that define market action.

An indicator usually smoothes that chaotic path and makes it appear to be understandable. However, bringing a sense of order to the chart comes with a price. All indicators are mathematical manipulations of price, volume, open interest or combination of them. The calculations can introduce order where none exists. Confirming signals generated by one indicator with another indicator using different calculation methods can prevent taking trades destined to lose by the vagaries of math.

Mistake 3 – Using Indicators Without Backtesting

Any of the most commonly available technical indicators works well at least once. And it is relatively easy to use charting software to find a spectacular winning trade. All too often, books and magazines include an example of only that breathtaking winner, and ignore the plentiful losing signals. The truth is most trades win or lose only a small amount.

To avoid the error of believing everything you read, you need to backtest or forward-test any idea before putting real money. You have to test every strategy at least 200 times before using it.

Mistake 4 – Not Analyzing The Overall Market Trend

Some indicators work best in trending markets and others work best in range-bound action. Using a trend following indicator is a recipe for disaster if prices are bouncing back and forth between clear support and resistance levels.

Trending markets tend to offer an extraordinary number of overbought or oversold signals on indicators designed to trade directionless markets. This will put you on the wrong side of the market and you usually won’t get a reversal signal until losses have become very significant.

You must know the strength and weaknesses of your indicator before using it. Analyzing the market structure and the overall trend on the weekly, and daily timeframes is essential to understand the overall direction of the market.