What Is A Technical Analysis Indicator?

Technical indicators calculate metrics related to a financial instrument. This calculation can be based on price, volume, onchain data, open interest, social metrics, or even another indicator.

What is the trading volume?

The trading volume may be considered the quintessential indicator. It shows the number of individual units traded for an asset in a given time. It basically shows how much of that asset changed hands during the measured time.

Some consider the trading volume to be the most important technical indicator out there. “Volume precedes price” is a famous saying in the trading world. It suggests that large trading volume can be a leading indicator before a big price move (regardless of the direction).

By using volume in trading, traders can measure the strength of the underlying trend. If high volatility is accompanied by high trading volume, that may be considered a validation of the move. This makes sense because high trading activity should equal a significant volume since many traders and investors are active at that particular price level. However, if volatility isn’t accompanied by high volume, the underlying trend may be considered weak.

Price levels with historically high volume may also give a good potential entry or exit point for traders. Since history tends to repeat itself, these levels may be where increased trading activity is more likely to happen. Ideally, support and resistance levels should also be accompanied by an uptick in volume, confirming the strength of the level.

What is the Relative Strength Index (RSI)?

The Relative Strength Index (RSI) is an indicator that illustrates whether an asset is overbought or oversold. It is a momentum oscillator that shows the rate at which price changes happen. This oscillator varies between 0 and 100, and the data is usually displayed on a line chart. What’s the idea behind measuring market momentum? Well, if the momentum is increasing while the price is going up, the uptrend may be considered strong. Conversely, if momentum is diminishing in an uptrend, the uptrend may be considered weak. In this case, a reversal may be coming.

Let’s see how the traditional interpretation of the RSI works. When the RSI value is under 30, the asset may be considered oversold. In contrast, it may be considered overbought when it’s above 70. Still, RSI readings should be taken with a degree of skepticism. The RSI can reach extreme values during extraordinary market conditions — and even then, the market trend may still continue for a while.

The RSI is one of the easiest technical indicators to understand, which makes it one of the best for beginner traders. If you’d like to read more about it, check out What is the RSI Indicator?.