Sharing of Technical Indicator Applications in Trading

Knowledge is not difficult to acquire, but action is not easy. For investment in the secondary market, everyone knows that one should not be greedy, nor should one chase after rising prices or sell at falling prices. But how many people can control their hands to achieve the unity of knowledge and action? In the Tao Te Ching, Laozi mentions Dao, Fa, and Shu. Dao refers to rules, natural laws, and core concepts; Fa refers to methods, legal principles, and systems; while Shu refers to actions and operational methods. The combination of Dao, Fa, and Shu is regarded as important principles and guidelines for guiding people's lives and social development.

For the secondary market, we can also categorize investment into Dao, Fa, and Shu, all three of which are indispensable.

Dao: Represents investment philosophy and beliefs, that is, the direction, goals, and values of investment. This includes analysis of long-term market trends, macro conditions, and fundamentals.

Fa: Represents the rules and regulations of investment, including investment strategies, risk management, and asset allocation.

Shu: Represents technical analysis, quantitative analysis, and trading psychology.

Today, this report will focus on "Shu" in trading, aiming to share the application of technical indicators and technical analysis in practice. For the vast majority of people, it is not necessary to learn many obscure technical indicators, as they are all lagging and cannot directly generate profits. This report will share commonly used technical indicator methods to help more people understand the significance of technical analysis.

Disclaimer: The cryptocurrencies and indicators mentioned in this report do not constitute investment advice and are for learning purposes only. The investment advice and indicator usage mentioned do not apply to all cryptocurrencies and products. The risks in blockchain are significant, 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 Bollinger Bands and RSI indicators
3. Variations of flag pattern consolidation
4. Summary

1. Explanation and application of MA moving average indicators

The MA indicator, also known as Moving Average, calculates the average price within a certain number of periods. For example, MA5 represents the average price of the last 5 time periods (including the current one) on the candlestick chart, whether at the minute, hourly, or daily level. The smaller the MA number, the more sensitive it is to fluctuations, focusing more on short-term movements; conversely, a larger MA number indicates slower fluctuations, focusing on long-term movements.

The MA numbers can be set according to user preferences. Here, I will share two sets of MA trading methods that I commonly use: the Vegas Channel and the Squeeze Channel.

Vegas Channel

The Vegas Channel, in simple terms, uses the 144 and 169 moving averages to determine medium to long-term trends. This method is not suitable for periods shorter than 15 minutes and is applicable for periods of 1 hour or longer.

Why use these two moving averages?

Upon careful observation, we can see that 144 and 169 are the squares of 12 and 13, respectively. The principle implicitly contains Gann's square theory and the Fibonacci sequence. The number 144 comes from Gann's square theory, while 169 is the square of the Fibonacci number 13. The combination of the two can yield better practical application results.

Example explanation:

Taking the 4-hour trend of OP as an example, we find that when the 144-day moving average crosses above the 169-day moving average, a golden cross is formed (the golden cross indicates that the 144 moving average crosses above the 169 moving average), which indicates a bullish outlook for the medium to long term, suggesting a potential entry point. Conversely, when the price reaches a peak and the 144 moving average crosses below the 169 moving average, a death cross is formed (the death cross indicates that the 144 moving average crosses below the 169 moving average), suggesting a cautious exit for the medium to long term.

Some may ask, isn't this too absolute? What about the back-and-forth golden and death crosses before the consolidation? How do you explain that? Isn't this just gambling?

My suggestion here is that since the 144 and 169 moving averages cannot determine short-term trends and have strong lagging characteristics, you can add the 7 and 14-day moving averages to assist in judging short-term trends. Let’s zoom in on OP’s trend; by using higher-level MA moving averages to determine medium to long-term market changes and then confirming with smaller-level MA moving averages' golden crosses, we can achieve the highest level of certainty.

The Vegas Channel is used to determine medium to long-term trends. Due to its lagging nature, it still needs to be paired with short-term moving averages for auxiliary verification. A strong market must see the 144 and 169 moving averages rising. If the price consolidates near the 144 and 169 moving averages, it indicates a weak short-term market, making it unsuitable for entry. At the same time, the 144 and 169 moving averages provide good support and resistance, suitable for operations like short-term rebounds from oversold conditions.

Squeeze Channel

The Squeeze Channel mainly derives from the Squeeze Theorem in mathematical calculus. In simple terms, if a function is "squeezed" by two other functions near a certain point, and both of these functions have the same limit, then the limit of this function will also approach the same value.

In secondary market trading, we can also apply a similar squeezing theorem model. We can simplify it into two moving averages, namely the 111 and 350 moving averages. Due to the longer period of the 350 moving average, it is recommended for use in short-term trading.

Why these two moving averages?

Dividing the 350 by the 111 moving average gives us a number that is closest to pi, approximately 3.15, or we can say that dividing 350 by 3.14 yields the closest number, which is 111.

Example explanation:

Taking the 1-hour trend of TRB as an example, when the blue line (350) is above and the yellow line (111) is below, forming a shape similar to or resembling a triangle, it indicates a successful "squeeze." After a successful squeeze, the subsequent trend is bullish. However, it is important to note that for a correct "squeeze" pattern, the 111 moving average must cross above the 350 moving average; if only one side crosses, it does not hold.

This channel is suitable for 1-hour and 4-hour levels, although the accuracy is generally moderate. However, once successful, the subsequent trend will be of a large magnitude. Therefore, when a squeeze pattern appears, it is advisable to pay close attention. We can also use other technical indicators for auxiliary judgment.

MACD (Moving Average Convergence Divergence)

MACD is one of the most commonly used technical indicators in trading. Its core is to analyze price momentum changes by comparing moving averages of different periods, thereby providing buy and sell signals. MACD mainly consists of three components: the zero line, the MACD line, and the signal line, and we mainly look at three types of changes.

Three changes of MACD:

1. MACD line and signal line crossover:

• Buy signal: When the MACD line (blue) crosses above the signal line (yellow), it indicates that market momentum is turning positive, and one may consider buying.
• Sell signal: When the MACD line (blue) crosses below the signal line (yellow), it indicates that market momentum is turning negative, and one may consider selling.

2. Relationship between MACD line and zero line:

• Above the zero line: When the MACD line is above the zero line, it indicates that the short-term average is higher than the long-term average, and the market is in an uptrend.
• Below the zero line: When the MACD line is below the zero line, it indicates that the short-term average is lower than the long-term average, and the market is in a downtrend.

3. Changes in the histogram:

• Histogram changes from negative to positive: When the histogram changes from negative to positive, it indicates that the MACD line is above the signal line, and momentum is increasing, which is a buy signal.
• Histogram changes from positive to negative: When the histogram changes from positive to negative, it indicates that the MACD line is below the signal line, and momentum is weakening, which is a sell signal.

Example explanation:

Taking the 4-hour trend of ETH as an example, when the MACD line crosses the signal line, it indicates a bullish trend. When the signal line crosses the MACD line, it indicates a bearish trend. MACD is applicable across all time frames, whether long-term or short-term, from 1-minute to weekly levels.

Advanced use of MACD and MA

In addition to the basic uses of MACD and MA, simply knowing these is far from enough. Ultimately, these technical indicator usages can be found in public materials, and many main players and market makers will deliberately create "false trends" to make you think that if you don't buy now, it will be too late. In reality, this is just a trick to lure you in.

How to guard against and identify these "false trends"?

False trends mainly guide newcomers into the market through MACD golden crosses. Taking BB's 15-minute trend as an example, when the 15-minute trend breaks a new high and then quickly falls, the MACD enters a death cross, indicating a correction. However, during the correction, the trend is rapidly recovering, even approaching the previous high, while the MACD has just begun to form a golden cross. We can understand this trend as "having the heart but lacking the strength," meaning that the price has rebounded to the previous high, while the MACD has just formed a golden cross. More than 80% of the time, this trend will end up like the image shown, where the strength quickly diminishes.

Continuing with the 1-hour trend of ETH, when the MACD forms a golden cross and the green histogram rises sharply, the price follows suit. This kind of rise is of high quality, indicating a potential entry point. Then, when the price enters a consolidation phase, the MACD turns into a death cross. After the adjustment, the MACD enters a golden cross, but the rise and trend do not continue as strongly as before; instead, it shows weakness, and the MACD volume histogram does not continue to strengthen. This "holding one's breath" state is very dangerous; although the MACD has formed a golden cross, the strength is not strong, and the longer this state persists, the more dangerous it becomes. When the price breaks a new high while the MACD does not reach a new high, we call this "top divergence," which is a strong sell signal. Similarly, when the price breaks a new low while the MACD does not reach a new low, we call this "bottom divergence," which is a buy signal.

2. Explanation and application of BOLL and RSI indicators

BOLL (Bollinger Bands)

BOLL is a very simple and practical technical analysis indicator designed by American stock analyst John Bollinger based on the principle of standard deviation in statistics. I personally believe it is very useful in secondary trading on the blockchain. BOLL consists of three lines: upper, middle, and lower bands. The upper, middle, and lower Bollinger Bands represent resistance and support levels. When the price reaches the upper Bollinger Band, it may pull back due to resistance; when it reaches the lower Bollinger Band, it may rise due to support. When the stock price rises above the upper Bollinger Band, it indicates overbought conditions with a possibility of a pullback, while falling below the lower Bollinger Band indicates oversold conditions and a very weak market. When the price drops from the upper Bollinger Band to the middle band, the middle band acts as support; if it falls below the middle band, it becomes a resistance level. When the price rises from the lower Bollinger Band to the middle band, it also faces resistance; breaking above the middle band and holding above it indicates that the resistance level has turned into a support level.

Here are 10 golden rules for Bollinger Bands that are very important:

1. Be cautious of pullbacks when the price breaks above the upper band.
2. Be cautious of rebounds when the price breaks below the lower band.
3. Strong trends are always above the middle band.
4. Weak trends are always below the middle band.
5. Narrowing bands indicate potential volatility.
6. The wider the bands, the stronger the market momentum.
7. The middle band guides the trend direction.
8. A sudden narrowing of the bands indicates a potential reversal.
9. A sudden widening of the bands indicates that consolidation is over.
10. The longer the bands narrow, the more significant and volatile the future changes will be.

Example explanation:

Taking the 1-hour trend of BTC as an example, BOLL mainly consists of three lines: upper band, middle band, and lower band. When the price exceeds the upper band, it indicates overbought conditions, and the probability of a pullback is high; when the price falls below the lower band, it indicates oversold conditions, and the probability of a rebound is high.

Continuing with the 1-hour trend of TRB, when the BOLL bands narrow, it indicates that extreme market conditions are likely to occur. However, BOLL cannot accurately determine the specific direction and requires other indicators for auxiliary judgment. The longer the narrowing period, the shorter the BOLL bands, indicating that future market conditions will be more intense. Additionally, in a strong upward trend, BOLL will gradually rise along the middle band, while in an extremely strong trend, BOLL will continuously rise above the upper band. Conversely, in a weak trend, BOLL will decline along the middle band, with the middle band transitioning from a support level to a resistance level. In an extremely weak trend, BOLL will continuously fall below the lower band.

RSI (Relative Strength Index)

RSI (Relative Strength Index) works by calculating the magnitude of price changes to gauge the strength of market trends and predict the continuation or reversal of trends. The RSI value fluctuates between 0 and 100, meaning that the price will never exceed this range. We can simplify this understanding: when RSI reaches 70, it indicates overbought conditions with increased pullback risk, while when RSI falls below 30, it indicates oversold conditions with potential for upward movement.

Example explanation:

Taking the 1-hour trend of BTC as an example, when RSI falls below 30, it indicates a need for consolidation and a pullback. However, this pullback is not absolute; it only signifies a very weak market and cannot serve as a direct buying basis. Additionally, when RSI breaks above 70, it indicates overbought conditions with potential pullback risk. However, this still cannot serve as a basis for buying or selling; it can only be used as auxiliary judgment. Note: In extreme market conditions, RSI can reach 99 or 1, so do not rely solely on RSI as a primary judgment basis.

Continuing with the 4-hour trend of EDU, after RSI breaks above 70, it continues to rise, ultimately reaching 99. Therefore, we cannot use the method of buying at 30 and selling at 70. We need to assess the nature of the stock/cryptocurrency, whether it is a small-cap, MEME-type coin, or a highly controlled coin. Compared to blue-chip coins, the RSI judgment for other small coins may need to be adjusted to ranges of 90 and 10, rather than 30 and 70, which requires personal judgment.

3. Variations of flag pattern consolidation

Flag pattern consolidation, also known as triangle consolidation, is not determined by indicators but by the changes in candlestick patterns. We can summarize it into 16 common basic variation types. If you see similar trends, you can consider buying, as the success rate is generally high, indicating a bullish outlook. However, there are also instances of failure. It is advisable to buy at the low points of the flag pattern, and when the price breaks out of the triangular area, the breakout area becomes a support level, allowing for entry near the support during subsequent declines.

Example explanation:

Taking the 15-minute trend of APT as an example, its trend closely replicates the third and tenth patterns shown above. However, it is important to note that this is just a successful case; many main players and market makers will deliberately create similar patterns to deceive traders. We need to be cautious and identify these patterns or set stop-loss orders in a timely manner.

Taking the 1-hour trend of TRB as an example, we observe that TRB has indeed utilized the three-week flag pattern consolidation trend, achieving a threefold increase in one week. Therefore, when we see similar trends in the market again, we can draw them out for verification.

4. Summary

As the saying goes, in trading, Dao, Fa, and Shu are all indispensable. This report focuses solely on "Shu" in the trading process. Merely learning and mastering the application of technical indicators is far from enough. There are many pitfalls in the market, and every three months or so, the trends and methods of upward and downward movements will undergo significant updates. Therefore, it is essential to continuously observe and summarize the subtle changes in the market.

Humans are alive, while indicators are dead. The existence of technical indicators is to assist in judgment after a thorough understanding and risk control; they cannot be used directly for profit, as all technical indicators are lagging and cannot achieve 100% accuracy. Only with sufficient understanding and risk control can they assist in investment; otherwise, it is just gambling.

At the same time, all technical indicators are not as simple as described in this report. Each indicator has different variations and methodologies. If studied carefully, each indicator can be researched for years. Therefore, the article does not cover all variations and methods. Additionally, each person's trading style is different, and the use of indicators will vary accordingly, requiring gradual adjustments based on one's trading style.