straightforward, in practice, it is quite difficult for a beginner to understand how to use the plethora of technical indicators and tools to find the right timing to enter and exit the market. In the next section below, we’ll discuss the most common technical trading strategies for beginners.
RSI Trading Strategy
The RSI trading strategy is one of the most common and simplest strategies for beginners. Essentially, the relative strength index (RSI) is a momentum indicator that can have a value from 0 to 100. When the RSI value is over 70, it indicates that the market is overbought, while a value under 30 indicates that the market is oversold.
An asset price in an overbought (priced higher than it’s worth) market is highly likely to be corrected. This could trigger a sell signal for the trade. If the RSI is under 30, the market is oversold (the price is lower than its true value), which means that the price may recover soon, so the trader would expect a price increase.
Moving Average Crossover Strategy
Another popular strategy is based on two moving averages, such as 50-day and 200-day. When the shorter-term moving average (50-day in this case) goes above the 200-day, it indicates that the price is in a rising trend, generating a buy signal. If the shorter-term moving average falls below the 200-day, it shows a downtrend, signaling that it’s time to sell.
Chart Analysis
Chart analysis consists of examining a financial instrument’s past prices to identify its trend, which can be an uptrend, downtrend, reversal, or continuation. Chart analysis is essentially the foundation of technical analysis because it helps traders anticipate the future price movements of an asset.
There are many types of price patterns, but one of the cornerstones of chart analysis is the support and resistance concepts. Support is the low level reached by the price over a set period of time, while resistance is the top level the price reaches over time.
When the price reaches the support level (the lowest price points in a period), the downtrend is expected to pause, while the resistance level means the uptrend is expected to pause. When these levels are hit, it’s not necessary for the trend to reverse (it may just pause for a while, then continue until the next support or resistance level). In this case, traders often use other indicators and tools to make a more accurate prediction.
There are many price patterns that can be observed in a chart that help traders predict future price movements. For instance, one of the most common price patterns is the triangle. In this formation, the price consolidates for a period until it is eventually forced to breakout (bullish trend) or breakdown (bearish trend).
Summary
All in all, there is no wrong or right technical trading strategy. However, to increase the accuracy of predictions and eliminate noise, many technical traders build their strategy on multiple indicators, such as a momentum indicator and a trend indicator, which help to confirm the direction of the price, the exit, and the entry points.