Prediction markets continue to gain traction as more people are now open to them in different trading markets. Over the years, traders and investors alike have relied on good trading tools to harness better profits from their assets. Among these tools are technical indicators.
Notably, these indicators allow traders to predict future market movements based on continuation patterns. In addition, these technical indicators are used in technical, financial analysis using graphs and charts, allowing traders to enter and exit the market guided by data-induced insights.
Why use Indicators in Prediction markets?
Prediction markets rely heavily on technical indicators to study several aspects like market trends, price movements, growth momentum, trading volumes, volatility, among others. Below are three main reasons why technical indicators are great tools while navigating through these markets:
Simplified price action analysis: In prediction markets, price action or price movement is the only way to predict price movements within a short period. With technical indicators, you can sieve out the exact data and most important information you need and in a way that it can be easily understood.
Secure your trading: You can access all the information you need to minimize trading mistakes and make informed trading decisions using technical indicators. In addition, indicators reduce the complexities that may lead to errors and bad, costly decisions.
Allows traders to access the information they otherwise wouldn’t access: Indicators analyze vast amounts of data, get the most critical and relevant datasets, and display them in a manner that anyone can easily consume.
Top Technical Indicators for prediction markets
Technical indicators used in prediction markets are grouped into four main categories.
Trend – shows the direction the market is likely to take.
Momentum – demonstrates the strength of a given trend.
Volatility – points out how much prices are changing and the extent of market movements.
Volume – indicates the number of units being exchanged in the market.
Below is a deeper dive into the top technical indicators used in prediction markets:
The moving average indicator is one of the best trend-based indicators traders use to confirm a trend using previous price action. Moving Average is called so because the data is updated as soon as new data sets are made available.
Traders can use either simple moving averages (SMA) or exponential moving averages (EMA) depending on the complexity of their analysis. SMAs are simple and only give the mean average of a set of figures. On the other hand, EMAs rely on a mix of current and past trading data and are the most preferred among traders.
The Moving Average indicator is very flexible and allows traders to undertake several modifications like changing the analysis period. In prediction markets trading, the Moving Average indicator is used to study price trends and movements.
When trading in prediction markets, traders have only two options to choose from. These options are time-bound and condition-based. Probability is used to determine the value of each of the two options. When using this indicator, key factors to consider include timing, volatility, and price movement direction.
Average true range (ATR)
This is an indicator for measuring volatility. Traders can determine the ATR by analyzing asset prices over a given period. ATR is very important in prediction market trading as it indicates how much the market is likely to shift.
While ATR indicates the level of price movement, it does not indicate the direction of the movements. Generally, high volatility translates to increased opportunities and calls for a better risk management strategy as prices can move in any direction.
Wilder’s DMI (ADX)
Wilder’s DMI (ADX) comprises three indicators that measure the strength and direction of a particular trend. The three indicators are;
Direction Movement Index (DMI): ADX (black line)
DI+ (green line)
DI- (red line)
The colors of the various indicators can be changed, but black, green, and red are the default colors used in most software. The Average Directional Index (ADX) line shows how strong the trend is. The DI+ (Plus Direction Indicator) and DI- (Minus Direction Indicator are used to indicate the direction of price movements.
Relative strength index
Traders use the relative strength index (RSI) to determine whether to buy or sell by signaling whether a market has been overbought or oversold. Traders can use this indicator to determine when to buy or sell just before the trend changes.
In terms of prediction markets, this indicator is used by traders to determine the right moment to join a trade (the entry point).
Stochastics is related to RSI and is used to determine if the market has been overbought or oversold. Compared to RSI, Stochastics only has two lines that indicate the trends. When these lines reach more than 80, the market will likely be overbought and may reverse very soon to create a downtrend. Conversely, when the lines go below 20, the market has been oversold and will probably become an uptrend soon.
This indicator is also made up of three lines and works on the principle that cost dangles around the moving average. The indicator is very versatile as the bands can be altered based on the impending market volatility. Traders use this trend to capture periods of trading high momentum markets or breakouts.
If the lines converge, it is always an indication of price consolidation and a possible trend change. A strong contraction could indicate very low volatility at the moment and an indication of an increase in volatility soon. When the lines diverge, it is an indication that the current trend is becoming stronger.
Pivot points are used to determine market trends and their direction over a given period. Pivot points are good for trading in prediction markets since they provide flexibility in timing to adjust to many changes in the market. They calculate and give seven different price levels based on the Open/High/Low and close from the previous trading day.
This indicator is built from several lines with a Pivot point line in the middle, three resistance lines above the pivot, and three support lines below the pivot midpoint.
Traders use Indicators to understand and predict the market. It also helps to minimize the level of guesswork and trading errors. When using indicators in prediction markets, traders constantly change, fine-tune, and backtest their trading strategies to get the best settings that minimize loss and guarantee higher returns.