An Introduction To Technical Indicators
An indicator is a mathematical calculation that can be used with the stock’s price and volume to help make investment choices. The end result is a value that’s used to anticipate future changes in price. Technical indicators, also known as “technicals”, are focused on historical trading data, such as price, volume, and open interest, rather than the fundamentals of a business, like earnings, revenue, or profit margins. Technical indicators are commonly used by active traders, since they’re designed to analyze short-term price movements, but long-term investors may also use technical indicators to identify entry and exit points.
There are two types of indicators: leading and lagging.
Leading indicators help you profit by attempting to forecast what prices will do next. Leading indicators provide greater rewards at the expense of increased risk. They perform best in sideways or trading markets. They work by measuring how overbought or oversold a stock is.
Lagging (or trend-following) indicators are best suited to price movements in relatively long trends. They don’t warn you of any potential changes in price. Lagging indicators have you buy and sell in a mature trend, when the risk is reduced.
Traders often use many different technical indicators when analyzing a security. With thousands of different options, traders must choose the indicators that work best for them and familiarize themselves with how they work. Traders may also combine technical indicators with more subjective forms of technical analysis, such as looking at chart patterns, to come up with trade ideas. Technical indicators can also be incorporated into automated trading systems given their quantitative nature.
Some of the trading indicators are derived from the price of the stock. Some are calculated on the basis of volume of stock traded and its price. Some are based on absolute numbers. So, they tend to go above or go below the zero line, infinitely. They are sometimes termed unlimited or elastic indicators.
But some are based on percentage of numbers. So, the downward limit of the indicator is always ‘Zero” and upward limit is always ‘Hundred’. They are sometimes termed limited or inelastic indicators.
These upward and downward limits are termed ‘Overbought’ and ‘Oversold’ zones of the indicators.
It is the uppermost area, usually beyond 70% to 80%, in the limited indicators. A stock reaches this area due to increased buying, relative to previous few sessions, determined by the indicator parameter. Here the price of a stock is considered too high for the time being. So the selling pressure is likely to increase, causing the prices to fall.
It is the lowermost area, usually below 30% to 20%, in the limited indicators. A stock reaches this area due to increased selling, relative to previous few sessions, determined by the indicator parameter. Here the price of a stock is considered too low for the time being. So the buying pressure is likely to increase, causing the prices to rise.
Some of the stock market indicators are listed below :-
- ADX Indicator
- Aroon Indicator
- Average True Range
- Bollinger Bands
- Commodity Selection Index
- Directional Index
- Ichimoku Kinko Hyo
- MACD Indicator
- Market Facilitation Index
- Mcclellan Oscillator
- Moving Averages
- Negative Volume Index
- On Balance Volume
- Open Interest
- Parabolic Sar
- Pivot Points
- Positive Volume Index
- Price Oscillator
- Relative Strength Index
- Trix Indicator
- Volume Indicator
- Volume Oscillator
- Williams R
- Zig Zag
The Best Technical Indicators for Day Trading
The MACD, RSI, moving average, Bollinger Bands, stochastics, and the list goes on, but what are the best technical indicators for day trading? Day traders need to act quickly, so trying to monitor too many indicators becomes time consuming, counter productive and is actually likely to deteriorate performance. When day trading–whether stocks, forex or futures–keep it simple. Use only a couple indicators, maximum, or not using any is fine too. Consider these tips to find the best day trading indicators for you.
Types of Technical Indicators
Pro KiT explores the fundamentals behind 12 of the most commonly-used technical indicators. It differentiates between lagging and leading indicators, and also explains some basic tactics for incorporating these markers into an overall investment strategy.
The following chart below shows some of the most common technical indicators, including Moving Average, Relative Strength Index (RSI), Moving Average Convergence-Divergence (MACD), Stochastic and Bollinger Band.
Unfortunately, there is no single indicator that is the best for day trading. Technical indicators are just tools, they can’t produce profits. Profits require a trader to use their indicators and price analysis skills in the correct way. This takes practice. Whatever indicators you decide to use, limit it to one to three. Using more indicators is redundant and could actually lead to worse performance.