Famous analytical tools used in technical trading in financial markets:
1. MACD Indicator (Moving Average Convergence Divergence)
Definition:
MACD is a trend-following indicator used to measure the strength and momentum of a trend, based on the difference between two moving averages (usually 12 and 26 periods).
Composition:
Fast Line (MACD Line): the difference between the 12-period and 26-period moving averages.
Signal Line: Moving average of the fast line (usually 9 periods).
Histogram: represents the difference between the MACD line and the signal line.
Signals:
Bullish crossover: when the MACD line crosses above the signal line = Buy signal.
Bearish crossover: when the MACD crosses below the signal line = Sell signal.
Divergence: If the price direction differs from the MACD direction, it may indicate a potential reversal in direction.
2. RSI Indicator (Relative Strength Index)
Definition:
RSI is a momentum indicator that measures the speed and strength of price movements, ranging from 0 to 100, and is used to identify overbought or oversold conditions.
Key readings:
Above 70: the market is in a state of overbought → potential for a downward reversal.
Below 30: the market is in a state of oversold → potential for an upward reversal.
Between 30 and 70: Neutral zone.
Signals:
Crossing above 30 from below: Buy signal.
Crossing below 70 from above: Sell signal.
Divergence: a difference between price movement and RSI can indicate a change in the upcoming direction.
3. Bollinger Bands Indicator
Definition:
Bollinger Bands is an indicator consisting of 3 lines: a Simple Moving Average (SMA) and upper and lower lines based on standard deviation. It is used to measure market volatility and identify entry and exit points.
Composition:
Middle Line: Simple Moving Average (usually 20 periods).
Upper Line: SMA + (2 × Standard Deviation).
Lower Line: SMA - (2 × Standard Deviation).
Signals:
Price breaking the upper limit: indicates a state of overbought, potentially followed by a correction.
Price breaking the lower limit: indicates a state of selling pressure, followed by a potential rebound.
Bollinger Bands Squeeze: a signal of a potential price explosion (upward or downward) approaching.
Combination of Indicators:
These indicators are often used together to confirm signals:
Example: If the MACD gives a bullish crossover and the RSI is below 70 and the price hasn't breached the upper limit of the Bollinger Bands, it may be a strong buy signal.
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