10 Types of Technical Indicators Experienced Traders Use
Traders trading in commodities, forex, shares, and other assets use technical indicators to determine price movement. Based on these indications, they decide whether to buy or sell securities. Continue reading to learn more about various indicators experienced investors use to predict future price trends.
What Are Technical Indicators?
Technical indicators, also known as trading indicators, are mathematical calculations that help stock, forex, and other traders forecast the price movements of a security. Most indicators fall into two groups – leading and lagging.
In short, leading indicators are useful in predicting future price movements, while lagging ones show past market trends. Note that you don’t need to use many to interpret trading signals; finding a few indicators that work for you is essential.
What Do Trading Indicators Look Like?
Technical indicators look like lines and can be seen in the chart area or below it. If you refer to a candlestick chart to identify trading opportunities, for instance, the indicator appears as a line corresponding to the candle pattern. The appearance of technical indicators is similar when they’re displayed in the area underneath the main chart.
Popular Technical Indicators Among Retail Traders
It would take a very long time to figure out every available analytical charting tool. Thus, we focus on those most traders and technical analysts use. Some of the most popular types of technical indicators are:
Moving Average (MA)
Moving averages are simple indicators that identify the direction of the current price trend. You can use this indicator to calculate average prices in various time formats, but the most common are 30-, 50-, 90-, and 120-day time frames.
You’ll spot jagged points going in opposite directions when observing chart patterns. To smooth these out and get a readable trendline, you’ll need to use MA technical indicators. The MA indicator takes a set of price points from a financial instrument and divides them by the number of data points to produce a single trend line.
If you opt for a 50-day moving average, you’ll need to divide the closing prices of a stock or other asset during that time by 50. The oldest data in your chosen time frame will be disregarded to make room for the newest. Thus the “moving average” term.
Moving Average Convergence Divergence (MACD) Momentum Indicator
MACD is an oscillator that shows if a stock has been bought or sold too much. MACD helps traders determine the trends and their momentum.
This technical indicator consists of two lines – the MACD line and the signal line. When the MACD line is above the signal line, the price increases, while it drops when the MACD line dips below the signal line. The more the MACD line gets away from the signal line, the higher the momentum is.
The Average True Range (ATR) Indicator
ATR is one of the stock market indicators showing a volatility range for the asset within the specified time frame. This trend indicator measures volatility and can be viewed on one-minute, daily, weekly, and monthly time scales.
You’ll notice that the line moves up and down on a corresponding price chart. If the asset’s price rises, the line will move up. Conversely, the line will go down as the price decreases.
Relative Strength Index (RSI)
RSI is an oscillator and one of the stock momentum indicators that helps determine the strength and speed of price movement. RSI fluctuates from zero to 100, showing overbought and oversold conditions of an asset.
If the asset you want to trade goes over 70, it is overbought and will likely decline. The higher it goes over 70, the more likely a reversal will occur. On the other hand, if the numeric value drops below 30, the stock is oversold or undervalued. The lower it falls below 30, the more likely a positive reversal and high trend strength are.
Aroon indicator shows whether a trend of the observed security remains stable or hits new lows or highs. This particular indicator for trading consists of Aroon Down and Aroon Up lines.
If you notice that the Up line crosses the Down line or vice versa, a trend is likely to change. For example, if Aroon Up gets to 100 and stays close to it while Aroon Down remains around zero, an uptrend is likely to happen.
Accumulation/Distribution Line (A/D Line)
If you know how the accumulation/distribution line works, you’ll be able to analyze stocks like a pro. The A/D line is one of the most popular technical trading indicators. It helps traders figure out how much money a stock or other security is making or losing.
A/D Line considers the asset’s trading range and its closing price. If the stock goes above the middle of the range, the line will increase, showing that more traders want to buy the asset. But if the A/D line falls, it indicates a downtrend since the price will likely finish in the lower part of the daily range.
Furthermore, you can use the A/D line to determine if a divergence is about to happen. If the line falls as the price rises or if the line rises and the price drops, the trend struggles to keep up and will likely reverse.
On-Balance Volume (OBV)
On-balance volume is similar to the A/D line, but there’s a crucial difference between these trading indicators. OBV considers only the security’s closing price, not the trading range. Still, you shouldn’t ignore this indicator because there are times when it could be helpful.
For instance, you could use the on-balance volume indicator to find stocks with a sharp rise in volume while their prices stay mostly the same. The OBV proves helpful in determining whether the volume flows into or out of the asset.
If you notice that the on-balance volume shows a high volume flowing into the security, the prices will likely soon experience a significant increase. If the OBV shows a high volume that flows out of the security, the prices are about to drop.
Stochastic and RSI oscillators are similar in some ways because these technical stock indicators display values as numerals. Besides the momentum, the stochastic oscillator shows the trend’s strength on a scale from zero to 100 and outlines whether securities are oversold or overbought.
You can use a stochastic oscillator to see how the asset’s closing price compares to other prices during a specified time. The numbers that should interest you most are 20 and 80.
If the value of the stock or other security drops below 20, it indicates that the asset is undervalued or undersold, which may present a lucrative opportunity. But if the oscillator shows that the value is above 80, the security is oversold or overvalued, indicating that its value may soon decline.
Average Directional Index (ADX)
The average directional index is made up of a black line and sometimes red (DI+) and green (DI-) lines as well. ADX is one of the technical stock indicators traders use to measure a trend’s momentum and strength. Note that this particular indicator doesn’t show a potential development of a price trend, which sets it apart from most other indicators.
ADX usually shows data based on a 14-day moving average, and 20 and 40 are the key numbers that indicate whether a trend is going up or down. If the value exceeds 40, the movement is strong in the direction it’s going, whether that’s up or down. However, if ADX is under 20, the trend is weak at best.
ADX consists of black, red, and green lines. This is how you can interpret these indicators for trading:
- An uptrend occurs when the black line is above 20 while the red line is over the green.
- If the black line is over 20 while the green line is above the red, the trend is downward.
- Lastly, if the black line is below 20 and the red and green lines crisscross each other in quick succession, the trend is weak.
Standard deviation is among the common technical indicators you can use to track price movements. It measures market volatility by showing how far current prices are from their average values. Note that this volatility indicator can’t predict the direction the price will go, just the possibility of volatility affecting it.
The standard deviation allows you to compare current price movements to their historical data. If the trending range is narrow, the volatility is low. This means the values are close to the mean value. Volatility is high when price movements are wide up and down, pushing prices further away from the mean.
Technical Indicators: Things To Know
The first rule you should follow when developing a trading strategy is to avoid using too many or too few indicators. If you only use one or two indicators to find trading opportunities, you probably won’t have enough information to make a decision. On the other hand, too many indicators will likely make you confused and could even keep you from making timely decisions.
Finding the best trading indicators can also present a dilemma, as the price action could be sending a “sell” signal while an indicator is sending a “buy” signal.
If that's the case, you might want to use different trading indicators or change the time frame. Tweak your approach until you can confirm the signals you’re getting.
Use Complementary Indicators
Find stock indicators that work well together and complement each other. This will help you avoid receiving redundant signals. Thus, you should consider pairing momentum and trend indicators. Some popular pairings are the MACD and ATR, or the stochastic oscillator and ADX.
Once you’ve chosen your indicators, implement them on your chart and watch the signals to see if they match up.
Avoid Information Overload
When you try to keep track of too many indicators on a single chart, you can suffer from information overload. This occurrence, also known as “analysis paralysis,” happens when you try to make sense of a lot of information, which prevents you from acting timely.
Trading tends to be overwhelming, even for experienced investors. Many traders use algorithmic trading to streamline the process and cut costs, and most top platforms for algo trading let traders perform actions as soon as the set conditions are met.
Still, understanding technical indicators can only be helpful as it equips future traders with a better set of skills, and more knowledge will surely improve the decisions you’ll make.
Now that we’ve explained stock indicators, it’s time to evaluate and combine them and start trading. Make sure to analyze historical trading data alongside current trends to see if they follow a similar pattern. Good luck!
What are technical indicators?
Technical or trading indicators are math calculations and analytical charting tools that help traders and investors determine if the price of a security will go up or down in the near future. Two main groups of stock market and other technical indicators are leading indicators, which predict future price movements, and lagging indicators, which show past trends.
What is the best technical indicator?
Traders use different trading indicators, but the Relative Strength Index (RSI) is one of the most popular ones. This stock momentum indicator helps determine how strong the price change will be.
How many technical indicators are there?
Many technical indicators are available, like oscillators, trend-following indicators, volatility indicators, and support and resistance indicators.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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