The first step to understanding the market is to understand the average price of the market in the recent period. Why is the average price so important? Because every trader will pay attention to the average price, and many indicators rely on the average price for secondary calculations. The average price reflects the real transaction cost over a period of time. As the balance point of profit and loss, the average price has a certain support and blocking effect on the price. There is a simple rule in the market. The actual price will fluctuate around the average price, and it will also drive the trend of the average price.
For this, we will naturally think of a method to calculate the average price. The average price can be obtained by adding the prices of the last few days and then dividing by the number of days. This is the algorithm of the simple moving average SMA. SMA is a trend indicator, which is more effective for stable market trends, but it reacts slowly to recent price changes, which may cause signal delays and is more affected by extreme values. EMA takes into account the weight of the price. The closer to the current time, the greater the weight, and the more sensitive to recent price changes. It can provide buy and sell signals faster, reduce signal delays, and is suitable for rapidly changing markets.
When we determine the average price in a period, another factor to measure is the speed of change of the average price, in the hope of buying when the price is just about to rise rapidly. Some people will use the slope change of the moving average to express the speed of change of the average price. Although it has the same function, it is not as intuitive as the indicator. At this time, we can use the momentum indicator to intuitively measure the speed of change of the average price. MACD is a momentum indicator.
If the average price is gradually rising now, and the rate of increase is also accelerating, is the upward trend coming? We can say that the probability of rising is increasing with probabilistic thinking, but there is a possibility that it will cause interference to us, that is, volatility. If a trading product has a large volatility or has just experienced a big rise or fall, then the current volatility is likely to be large. Even if the conditions of the trend indicator and momentum indicator are met, it may just be a wide fluctuation. Then we choose a volatility indicator to measure the volatility of the market price, such as Bollinger Bands.
Therefore, MA, MACD, and Bollinger Bands help us observe the current trend, momentum and volatility of the market. Some people do not use MACD but directly use the slope of MA to observe the rate of change of the trend. Some people do not use Bollinger Bands but use the distance of MACD from the zero axis to judge volatility. They feel that they can greatly improve the winning rate. In fact, they also correctly understand the current state of the market and make better predictions.
Understand the principles behind the indicators and the problems that each indicator needs to solve. Standing on the shoulders of giants, we can use quantitative thinking to quickly increase "experience value" in a short period of time. By combining these three types of indicators, we can find the most effective parameter range in historical backtesting, thereby creating a stable and effective quantitative strategy.
Perhaps the performance of historical data does not mean that the future will definitely be the best, but humans have collective commonalities, and the rules of the past can definitely be used for transactions in the future. When you are proficient in using several indicators and then determine better parameters through quantitative thinking, you can definitely make money in this market.