by Ian Harvey
Introducing the concept of technical analysis indicators is the purpose of this article. The information provided will explain what technical indicators are, and how to use them in your trading, which may help you in your future investments. It is important for an investor to recognize the various patterns that occur in the movements of the stocks that s/he, either owns, or may wish to purchase in the future.
Using technical analysis indicators provides clues to the investor, which in turn, helps interpret the market patterns and eventually a reasonable future behavior of the price. Usually a combination of price, volume and time-sensitive technical indicators are used to maximize profits.
Technical analysis indicators are the basis of technical analysis which is used to determine future financial, stock or economic trends. Technical indicators are used to help the investor know when to enter or exit a trade, to be able to make a profit. Simply put, technical indicators look at price information and translate it into simple, easy-to-read signals that can help the investor determine the correct time as to when to buy and when to sell.
A technical indicator is a result of mathematical calculations based on indications of combinations of price, time and volume. The values obtained are used to forecast probable price changes. It is a series of data points that are derived by applying a formula to the price data of a security. This price data applies to any combination of the open, high, low, or close over a period of time. The price data is entered into the formula and a data point is produced.
Also, technical analysis indicators, collectively called "technicals," are distinguished by the fact that they do not analyze any part of the fundamental business, like earnings, revenue and profit margins. The active trader in the market uses technical indicators most extensively because they are designed primarily for analyzing short-term price movements. If you are a long-term investor, most technical indicators are of little value, as they do not cover what is happening in the underlying business. The long-term investor is best off analyzing the long-term trend by identifying good entry and exit points for the stock.
Technical analysis indicators are derived from technical charts – which can be graphical or pictorial representations of the market activity in terms of upward or downward movements in stock prices over a period of time. However, some technical chart formations may also take into account trading volumes in the calculations.
Mathematically, a technical chart is a plot of a set of price data (on the vertical axis) and a function of time (on the horizontal axis). This price data can include a stock’s opening price, closing price, the day’s high or low price, average price, or a combination of these. The plotted data points on the chart can show as individual points or as small bars.
When all the data points on the chart are joined, a wave-like pattern is obtained. This pattern is then subjected to technical analysis by experts, who apply standard mathematical formulae to these price movements in order to arrive at technical indicators, from which they can predict the future market price of a stock or its market trend (upward/downward movement).
There are many different technical indicators available, and it is important for the investor to choose those that are applicable to his/her type of trade and trading method.
There are two main categories that technical indicators fit into, which are leading indicators and lagging indicators.
Leading indicators change before the underneath commodity changes, whereas lagging indicators are usually behind, or follow the event.
The main benefits of leading indicators is the early signaling for entry and exit, it generates more signals and allows more opportunities to trade in trading markets.
Lagging indicators follow the price action and are also known as trend-following indicators. Trend-following indicators work best when markets or securities develop a strong trend and signals traders to take long position and keep holding the position as long as the trend is intact.
Volume indicators help to confirm the strength of the trend.
• Volume Oscillator
• On Balance Volume
• Chaikin Oscillator
• Money Flow Index
• Compare Range and Volume
Momentum indicators help to determine the speed at which price is changing.
• Money Flow Index
• On Balance Volume
• Price and Volume Trend
• Volume Rate of Change
Price Indicators are computed by prices data. A subcategory of Price Indicators is oscillators.
Oscillators are indicators that are usually computed from prices and tend to cycle or “oscillate” within a fixed or limited range.
• Average True Range
• Chaikin Oscillator
• Chaikin Volatility
• Detrended Price Oscillator
• Force Index
• Ichimoku Kinko Hyo
• Moving Average of Oscillator
• Price Rate of Change
• Relative Vigor Index
• Slow Stochastic
• Stochastic Oscillator
• Ultimate Oscillator
• Williams` Percent Range
Trend indicators help to determine future direction and trend.
• Average Directional Movement Index
• Accumulation Swing Index
• Commodity Channel Index (CCI)
• Directional Movement System
• Mass Index
• Moving Average
• Parabolic SAR
• Pivot Points Support and Resistance Lines
• Standard Deviation
• TRIX indicator
• Williams` Accumulation/Distribution
• Hindenburg Omen
Bill Williams has developed several proven trading tools.
• Awesome Oscillator
• Gator Oscillator
• Market Facilitation Index
Volatility indicators are used to judge the strength of the trend and breakouts.
• Chaikin Volatility
• Volatility Ratio
• Average True Range
• Fibonacci numbers
• Gann numbers
• Elliott's Wave Theory
Other Various Market Indicators
• Analyst Rankings of Sectors
• Five-Month Losing Streaks
• Consumer Spending
• Pending Home Sales
A technical indicator can provide unique perspective on the strength and direction of the underlying price action within the stock market. Its main functions are to alert, to confirm and to predict.
When looking at price movement on a computer screen the stock prices continually fluctuate, and, in most cases, it is difficult to discern a pattern of when to enter or exit a trade. However, technical analysts, to smooth out the data and make it easier to understand, are able to plot the movements of the stock on a chart. By plotting the highs, lows, open, close and average prices, then we can understand the movements of very volatile stock. The data becomes smoothed out to show a clearer picture.
Other benefits of technical indicators to the investor are:-
• Determining the support and resistance levels. This will indicate if a stock’s price has dropped lower (support levels) or has climbed higher (resistance levels).
• That some indicators can help determine the future price of a share.
• Technical indicators help in establishing trends (upward or downward), which are critical for both traders and investors.
• Technical indicators always alert a technical analyst if any major price action or/and volatility is about to occur in a stock’s price.
1. Indicators simply provide “indication,” and many investors tend to forget this fact and ignore the price action of a security and focus solely on an indicator.
2. An indicator filters price action with formulas. As such, they are derivatives and not direct reflections of the price action. Any analysis of an indicator should be taken with the price action in mind.
3. The same indicator may exhibit different behavioral patterns when applied to different stocks.
4. When indicators generate buy and sell signals, the signals should be taken in context with other technical analysis tools.
5. The same indicator may exhibit different behavioral patterns when applied to different stocks.
6. Choosing an indicator to use for analysis is difficult as there are hundreds in use today, and more being created every week.
7. Choose indicators that complement each other, instead of those that move in unison and generate the same signals. Two or three indicators are usually sufficient in most cases.
The best technical analysis indicators are those that have in the past been tried, tested and proven to be successful.
Do not attempt to master all technical analysis indicators and oscillators. With time you will develop the art of judging profitable trades using technical indicators. Use technical indicators that will complement your trading style.
Use two or three indicators to analyze stock prices, as using just one indicator may give you a false signal. With time you will develop the art of judging profitable trades using technical indicators.
Each technical indicator provides unique information. You will find you will naturally gravitate toward specific technical indicators based on your trading personality, but it is important to become familiar with all of the technical indicators at your disposal.
You should also be aware of the one weakness associated with most technical analysis indicators. Because technical indicators look at historical price data, they do lag behind current market data to an extent, but they still provide invaluable information. Lagging indicators follow the price action and are known as trend-following indicators and tend to lead to many false signals. They give late signals that cause late entry which is a disadvantage to investors.
To compensate for this, leading indicators can be helpful. They will generate more signals and allow more opportunities to trade in trading markets but on the other hand, more signals and earlier signals mean that the changes of false signals will also increase which could lead to an increase in potential losses.
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