A Technical Indicator is a mathematical calculation based on historic data, like price and volume. Technical analysts use these indicators in order to forecast future price movements. Technical Indicators are a fundamental part of technical analysis. These indicators are generally in the form of “Chart patterns” that intend to predict the trend of the market Or “Oscillators” which provide data regarding overbought and oversold conditions in the market
Technical indicators are also referred to as “technicals”. Technical Analysis is a trading discipline employed to forecast the direction of prices through the study of past market data. Such as price and volume. Technical Indicators help a trader to do just that.
Types of Technical Indicators
There are 2 basic types of technical indicators
- Overlays : These indicators are generally plotted over the price data in charts. Some of the most common overlays are, Bollinger bands and moving averages.
- Oscillators : Technical Indicators that oscillates between, low-high, or oversold – overbought are oscillators. These generally appear on the bottom of the price chart. Some of the most common oscillators are, MACD and RSI.
Here is the list of the 5 most popular/common Technical Indicators :
1. Moving Average (MA)
A Moving average is a Technical Indicator that traders and investors may use to determine the trend of the market. A moving average indicator helps smooth out the price data by creating an average price. Analysts use the moving average to examine support and resistance levels by evaluating the previous price action or movement of a security’s price.
There are many types of moving averages. And some traders use multiple MAs to confirm trading signals. In other words, what moving average is good to use depends upon the trading style of the trader. Some of the most common moving averages are SMA, EMA, And WMA.
2. MACD Indicator
Moving Average Convergence and Divergence or MACD is one of the most appreciated technical indicators in the world. MACD is a momentum Oscillator but unlike most oscillators, it is not used to identify overbought or oversold conditions. In other words, It is a trend following indicator which shows the relationship between 2 Exponential moving averages.
It appears on the chart as two lines that oscillate without boundaries. These 2 lines are 1. “MACD line” and 2 ”Signal line”. MACD line is calculated by subtracting 26-day ema from 12-day ema. Whereas a Signal line is a nine-day ema of the MACD line. The crossover of the two lines gives trading signals similar to a two moving average system.
3. Relative Strength Index Indicator (RSI)
The Relative Strength Index or RSI is a momentum indicator. Used by technical analysts to measure the speed and change of price movements to evaluate overbought and oversold conditions. RSI oscillates between zero and 100. RSI is one of the most important tools when it comes to predicting reversals. In conclusion, having an understanding of RSI indicators helps a trader strengthen his or her trading system.
4. Bollinger Bands Indicators
Bollinger Bands are a set of three lines that represent volatility, which is the range in prices that they have historically traded within. The 2 outer lines show where the upper and lower levels of the price movement should trade. whereas the centre line shows the price action between the other 2 lines. When these bands shrink, this indicates high volatility, Whereas when these bands expand, this suggests low volatility may be present in the market.
5. Fibonacci Retracement Indicators
Fibonacci retracement is one of the most popular tools among technical analysts. It is generally used to figure out possible support and resistance levels. These levels are horizontal lines representing a percentage based on the Fibonacci sequence,
Fibonacci retracement works in every time frame and in every segment. In order to draw Fibonacci retracement, the trader should first analyze the trend of the market. To draw a Fibonacci retracement place the grid from low to high in an uptrend and from high to low in a downtrend. Set the grid to display the .382, .50, .618, and .786 retracement levels.
This helps traders to identify possible reversal and continuation points in the market. In conclusion, It works best in trendy markets.
Technical indicators provide solid information regarding the trend and momentum of the market. However, a Trader should not trust an indicator blindly. as similar to everything in the world of technical analysis, Indicators have flaws. In the end, it all comes down to a trader’s understanding of indicators. No indicator works every time, However, a combination of multiple indicators can be used in a larger trading system. to make consistent profits in the market
In conclusion, There have been hundreds of technical indicators and oscillators developed for this specific purpose, and this article has provided a few that you can start trying out. Use the indicators to develop new strategies or consider incorporating them into your current strategies. and determine which ones to use.