Sharing on the application of technical indicators in trading

Author: Jian Shu

Knowing is not difficult, but doing is not easy. For investment in the secondary market, everyone knows that you can't be greedy, and you can't chase the rise and sell the fall, but how many people can control their hands to achieve unity of knowledge and action? In the Tao Te Ching, Lao Tzu mentioned Tao, law, and art. Tao refers to rules, natural laws, and core concepts, law refers to methods, legal principles, and systems, and art refers to behavior and operating methods. Tao, law, and art are combined and regarded as important principles and criteria for guiding people's lives and social development.

For the secondary market, we can also divide investment into Tao, law, and art, and none of the three can be missing

Tao: represents investment philosophy and investment beliefs, that is, the direction, goals, and values ​​of investment. Including analysis of long-term market trends, macroeconomic conditions, and fundamentals.

Law: represents the laws and rules of investment, including investment strategies, risk management, and asset allocation.

Technique: Technical analysis, quantitative analysis, and trading psychology on behalf of investment

Today, this report will focus on the "technique" in trading. Its purpose is to share the application of technical indicators and technical analysis in actual combat. For most people, there is no need to learn many and unconventional technical indicators, because technical indicators are lagging and cannot directly make profits. This report will share commonly used technical indicator methods to let more people know the significance of technical analysis.

Statement: The currencies and indicators mentioned in this report do not constitute investment advice, but are only for learning and use. The investment advice and indicator usage mentioned are not applicable to all currencies and products. Blockchain is extremely risky, and you may lose all your principal. Please do your own research.

The article mainly includes:

1. Explanation and application of MA and MACD indicators

2. Explanation and application of Boll and RSI indicators

3. Flag arrangement variation

4. Summary

1. Explanation and application of MA moving average indicator

MA indicator, also known as Moving Average, calculates the average price within the number. For example, MA5 represents the average price of candlestick charts in 5 time periods (including the current one), whether it is minute level, hour level or day level. The smaller the MA number, the more sensitive the fluctuation is, and it focuses more on short-term fluctuations. On the contrary, the larger the MA number, the slower the fluctuation is, and it focuses on long-term fluctuations.

The MA number is set according to the user's preference. Here I share two sets of MA trading methods that I often use, namely Vegas Channel and Squeeze Channel.

Vegas Channel

The Vegas Channel, its simplified explanation is to use the 144 and 169 moving averages to judge the medium and long-term trends through three moving averages. This method is not suitable for cycles below 15 minutes, but is suitable for cycles above 1 hour.

Why use these two moving averages?

If we observe carefully, we can see that 144 and 169 are the squares of 12 and 13 respectively. The principle implies Gann's square theory and Fibonacci sequence. That is, the number 144 comes from Gann's square theory, and the number 169 is the square of the Fibonacci number 13. The two must be combined to achieve better application effects in actual combat.

Explanation:

Take OP's four-hour trend as an example, we find that when the 144-day moving average crosses the 169-day moving average, a golden cross is formed (the golden cross represents the 144 moving average crossing the 169 moving average), which means a medium- to long-term bullish trend, and you can try to enter the market. When the price reaches the top, the 144 moving average crosses the 169 moving average, forming a dead cross (the dead cross represents the 144 moving average crossing the 169 moving average), then you should exit the market and wait and see in the medium- to long-term.

Then someone will ask, what you said is too absolute, how do you explain the golden cross and dead cross of the moving average before the sideways trading? You are just gambling!

My suggestion here is that since the 144-day moving average and the 169-day moving average cannot determine the short-term trend and have a strong lag, the 7-day and 14-day moving averages can be added on this basis to assist in determining the short-term trend. Let's zoom in on the trend of OP, judge the medium- and long-term market changes through the large-level MA moving average, and then confirm it again through the small-level MA moving average golden cross, so that the certainty can be maximized.

The Vegas channel is used to judge the medium and long-term trend. Due to the lag of the Vegas channel, it still needs to be supplemented with the short-term moving average for auxiliary verification. A strong market must achieve an upward trend of the 144 and 169 moving averages. If the price is sideways near the 144 and 169 moving averages, it means that the short-term market is weak and it is not suitable for entry. At the same time, the 144 and 169 moving averages have good support and pressure effects, which are suitable for ultra-short-term oversold rebounds and other operations.

Squeeze channel

Squeeze channel, mainly comes from the squeeze theorem (Squeeze Theorem) in mathematical calculus. Its simplified explanation is that if a function is "squeezed" by two other functions near a certain point, and the limits of these two functions are the same, then the limit of this function will also tend to the same value.

In the secondary market trading, we can also use a similar squeeze theorem model. We can simplify two moving averages, namely 111 and 350. Since the 350 moving average has a longer period, it is recommended to use it in short-term trading.

Why these two moving averages?

The number we get when we divide the 350 and 111 moving averages is closest to pi, which is 3.15, or we divide 350 by 3.14, and the closest number is 111.

Example explanation:

Let's take the 1-hour trend of TRB as an example. When the blue line (350) moving average is on the top and the yellow line (111) moving average is on the bottom, forming a similar or approximate triangle shape, it means that the "squeeze" is successful. After the success, the subsequent trend is bullish. However, it should be noted that for a correct "squeeze" pattern, the 111 moving average must cross the 350 moving average. If only one side crosses, it is not established.

This channel is applicable to the 1-hour and 4-hour levels, but the accuracy is average. However, once successful, the subsequent trend will be a super-large-scale market, so when a squeeze pattern appears, you can pay more attention and concern, and we can also use other technical indicators to assist in judgment.

MACD (Moving Average Convergence and Divergence)

MACD (Moving Average Convergence and Divergence) is the most commonly used technical indicator in trading. The core of the indicator is to analyze the changes in price momentum by comparing moving averages of different periods, thereby providing buy and sell signals. MACD is mainly divided into three types: zero line, MACD line, and signal line, and mainly looks at three changes.

Three changes of MACD:

1. Crossover of MACD line and signal line:

• Buy signal: When the MACD line (blue) crosses the signal line (yellow) from below, it indicates that the market momentum has turned positive and you can consider buying long.

• Sell signal: When the MACD line (blue) crosses the signal line (yellow) from above, it indicates that the market momentum has turned negative and you can consider selling.

2. The relationship between the MACD line and the zero line:

• Above the zero line: When the MACD line is above the zero line, it indicates that the short-term average line is higher than the long-term average line and the market is in an upward trend.

• Below the zero line: When the MACD line is below the zero line, it indicates that the short-term average line is lower than the long-term average line and the market is in a downward trend.

3. Changes in the bar chart:

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• The bar chart changes from negative to positive: When the bar chart changes from negative to positive, it means that the MACD line is above the signal line, and the momentum is increasing, which is a buy signal.

• The bar chart changes from positive to negative: When the bar chart changes from positive to negative, it means that the MACD line is below the signal line, and the momentum is weakening, which is a sell signal.

Example explanation:

Let's take ETH's 4-hour trend as an example. When the MACD line crosses the signal line, it means the market is bullish, and when the signal line crosses the MACD line, it means the market is bearish. At the same time, MACD is applicable to all time periods, whether long-term or short-term, whether 1 minute level or weekly level, it is still applicable.

Advanced Use of MACD and MA

In addition to the basic use of MACD and MA, it is far from enough to just learn these. After all, the use of these technical indicators can be queried through public information. Many main players and dealers will also deliberately create "fake trends" through this point, making you think it will be too late if you don't buy. In fact, it is a trick to trick you into getting on the bus.

How to prevent and identify these "fake trends"?

The fake trend is mainly to guide novices into the market through the MACD golden cross, taking the 15-minute trend of BB as an example. When the 15-minute trend breaks through the new high, it turns to fall rapidly, and MACD enters a dead cross, which means that a callback is started. However, during the callback, its trend is recovering rapidly, even approaching the previous high, but at this time MACD has just started a golden cross. We can understand this trend as "the heart is willing but the strength is insufficient", that is, the price has rebounded to the previous high, but MACD has just crossed. More than 80% of the results of this trend will be the same as this picture, and the hardness will soften after a while.

Let's take ETH's 1-hour trend as an example. MACD crosses, the green column rises sharply, and the price follows the rise. This rise is a high-quality increase, which means that you can enter the market to follow up, and then the price enters the sideways adjustment stage, and MACD turns to a dead cross. After the adjustment, MACD entered the golden cross, but the increase and trend did not continue like the previous golden cross, but was unable to rise, and the MACD volume column was not in a state of continuous strengthening. This "holding breath" state is very dangerous. Although MACD is golden, the strength is not strong, and the longer this state lasts, the more dangerous it is. When the price breaks through a new high but MACD does not reach a new high, we call it "top divergence", which is a strong sell signal. Similarly, when the price breaks through a new low but MACD does not reach a new low, we call it "bottom divergence", which is also a buy signal.

2. Interpretation and application of BOLL and RSI indicators

BOLL (Bollinger Bands)

BOLL is a very simple and practical technical analysis indicator designed by John Bollinger, a US stock analyst, based on the standard deviation principle in statistics. I personally think it is very useful in the secondary trading of blockchain. BOLL is composed of three lines: upper, middle and lower, also called upper rail, middle rail and lower rail. The upper, middle and lower lines of the Bollinger Bands represent pressure and support respectively. When several reach the upper Bollinger Band, they will pull back due to pressure. When they reach the lower Bollinger Band, they will pull up due to support. When the stock price rises above the upper Bollinger Band, it means it is overbought and there is a possibility of a pullback. It also means that the stock is very strong at present. On the contrary, when the stock price falls below the lower Bollinger Band, it means it is oversold and the market is extremely weak. When the stock price falls from the upper Bollinger Band to the middle Bollinger Band, the middle Bollinger Band plays a supporting role. If it falls below the middle Bollinger Band, it becomes a pressure level. When the stock price rises from the lower Bollinger Band to the middle Bollinger Band, it also faces pressure. Breaking through the middle Bollinger Band and standing firm means that the pressure level turns into a support level.

The following are the 10 golden basic rules of Bollinger Bands, which are very important:

1. When the price breaks out of the upper track, beware of callbacks. 2. When the price falls out of the lower track, beware of pullbacks. 3. Strong market conditions are always above the middle track. 4. Weak market conditions are always below the middle track. 5. The narrowing of the upper and lower tracks hides mutations. 6. The larger the opening, the greater the market momentum. 7. The middle track guides the trend direction. 8. The sudden closing of the channel indicates a reversal. 9. The sudden opening of the channel means that consolidation is no longer. 10. The longer the channel narrows, the smaller the closing, and the more obvious and drastic the changes in the future market.

Example explanation:

Let's take the one-hour trend of BTC as an example. BOLL is mainly divided into three lines, namely the upper track, the middle track, and the lower track. When the price exceeds the upper track, it means overbought, and the probability of a pullback is high. When the price falls below the lower track, it means oversold, and the probability of a pullback is high.

Let's take the trend of TRB for 1 hour as an example. When the BOLL band narrows, it means that there will be extreme market conditions, but BOLL cannot accurately determine the specific direction, and other indicators are needed to assist in judgment. The longer the narrowing time, the shorter the BOLL band, which means the more intense the future market conditions. At the same time, in a strong rising market, BOLL will rise slowly along the middle track, and in a super strong market, BOLL will continue to rise above the upper track. On the contrary, in a weak market, BOLL will fall along the middle track, and at this time the middle track will turn from a support position to a pressure position. In a super weak market, BOLL will continue to fall above the lower track.

RSI (Relative Strength Index)

RSI (Relative Strength Index) is a measure of the strength of the market trend by calculating the amplitude of the stock price increase or decrease, and predicts the continuation or reversal of the trend. The value of RSI fluctuates from 0 to 100, which means that the price will not exceed this range in any case. We can simplify it to understand that when RSI reaches 70, it means that the market is overbought and the risk of callback is increased, and when RSI falls below 30, it means that the market is oversold and may rise.

Example explanation:

Let's take the 1-hour trend of BTC as an example. When RSI falls below 30, it means that it needs to go sideways and pull back. However, this pullback is not absolute. It only means that the market is very weak and cannot be used as a direct basis for buying. Secondly, when RSI breaks through 70, it means overbought and there may be a risk of pullback. But this still cannot be used as a basis for buying and selling, and can only be used as an auxiliary judgment.  Note: In extreme market conditions, RSI can reach 99 or 1, so do not use RSI as the main basis for judgment.

Let's take the 4-hour trend of EDU as an example. After RSI breaks through 70, it continues to rise and finally reaches 99. Therefore, we cannot use the method of buying at 30 and selling at 70. We need to judge the nature of stocks/currencies, whether they are small-cap, MEME-type currencies, or highly controlled currencies. Compared with blue-chip currencies, the RSI judgment of other small currencies may need to be raised to the range of 90 and 10, rather than 30 and 70, which requires your own judgment.

Three, Flag Consolidation Variations

Flag consolidation is also called triangle consolidation. This consolidation is not judged by indicators, but by the trend changes on the K-line. We can summarize it into 16 common basic types of changes. If you see a similar trend, you can buy it. Generally, the success rate is very high, and the subsequent bullish trend is bullish. However, there are also times of failure. It is recommended to buy at the low point of the flag. When the triangle area breaks through and rises, the breakthrough area becomes a support position. You can intervene near the support when it falls later.

Example explanation:

We take the 15-minute trend of APT as an example, and its trend is a standard replica of the third and tenth trends in the above figure. However, it should be noted that this is only a successful case. Many main players and dealers will deliberately make similar graphics to deceive people into getting on board. We need to be careful to identify or stop losses in time.

Let's take TRB's 1-hour trend as an example. We observed that TRB used the three-week flag consolidation trend to achieve a three-fold increase in a week. Therefore, when we see a similar trend in the market again, we can draw it ourselves for verification.

Fourth, Summary

As the saying goes, Tao, Fa, and Shu are indispensable in trading. This report only focuses on the "Shu" in the trading process. It is far from enough to just learn and master the use of technical indicators. There are many pits in the market, and the market will have a big update in its trend, rising and falling methods every three months or so, so it is necessary to keep looking at and summarizing, and observe the subtle changes in the market.

People are alive, indicators are dead, and the existence of technical indicators is a method for us to assist in judging transactions after sufficient understanding and risk control, and cannot be used directly for profit. After all, all technical indicators are lagging and cannot be 100% accurate. Only after we have sufficient understanding and risk control can we assist in investment, otherwise it is gambling.

At the same time, all technical indicators are not as simple as described in the report. Each indicator has different variations and methodologies. If you study carefully, you can study each indicator for several years, so the article does not mention all the variations and methods. At the same time, everyone has different styles, and the use of indicators is also different. You need to gradually adjust according to your own trading style.