Indicator meaning is a tool that traders use to gain additional insight into the price action of an asset. These indicators make it easier to identify patterns and spot buy or sell signals in the current market environment. There are many different types of indicators, which we will showcase some of the more notable ones in this article.
Relative Strength Index (RSI)
The RSI is a momentum indicator that depicts whETHer an asset is overbought or oversold. It does this by measuring the magnitude of recent price changes (the standard setting is the previous 14 periods – so 14 days, 14 hours, etc.). The data is then displayed as an oscillator that can have a value between 0 and 100.
As the RSI is a momentum indicator, it shows the rate at which the price is changing. This means that if momentum is increasing while the price is rising, the uptrend is strong, and more and more buyers are stepping in. Conversely, if momentum is decreasing while the price is rising, it may show that there is an increasing number of sellers in the market.
Conventionally, when the RSI value is over 70, the asset is overbought, and when it’s under 30, it is oversold. As such, extreme values may indicate an impending trend reversal or pullback.
Moving Averages
The two most commonly used moving averages are the simple moving average (SMA or MA), and the exponential moving average (EMA). The SMA is plotted by taking price data from the defined period and producing an average. For example, the 10-day SMA is plotted by calculating the average price over the last 10 days. The EMA, on the other hand, is calculated in a way that gives more weight to recent price data. This makes it more reactive to recent price action.
Traders often use the relationship of the price to specific moving averages to gauge the current market trend. For example, if the price stays above the 200-day SMA for a prolonged period, the asset may be considered to be in a bull market by many traders. Traders also pay attention to the cross-over signals between two moving averages (e.g. golden cross patterns).
Stochastic RSI
The Stochastic RSI is a momentum oscillator used to determine whETHer an asset is overbought or oversold. As the name suggests, it’s a derivative of the RSI, as it’s generated from RSI values instead of price data. It’s created by applying a formula called the Stochastic oscillator formula to the ordinary RSI values. Usually, the Stochastic RSI values range between 0 and 1 (or 0 and 100).
Due to its greater speed and sensitivity, the StochRSI can generate a lot of trading signals that can be tricky to interpret. Generally, it tends to be the most useful when near the upper or lower extremes of its range.
Bollinger Bands (BB)
Bollinger Bands measure the volatility of the market, as well as overbought and oversold conditions. They are made up of three lines - an SMA (the middle band), and an upper and lower band. The settings may vary, but typically the upper and lower bands are two standard deviations away from the middle band. As volatility increases and decreases, the distance between the bands increases and decreases as well.
Generally, the closer the price is to the upper band, the closer to overbought conditions the charted asset may be. Conversely, the closer the price is to the lower band, the closer to oversold conditions it may be. For the most part, price will stay within the bands, but on rare occasions, it may break above or below them. While this event may not be a trading signal in itself, it can act as an indication of extreme market conditions.
In Conclusion
Indicator meaning is a tool that traders use to gain additional insight into the price action of an asset. Traders can make use of the many indicators out there to enable them to get a better grasp of the market trends.
