Indicators

What are Indicators for Trading?

Indicators are mathematical calculations based on the price, volume, or open interest of a security or contract. Indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Indicators can also be used to identify when a security is overbought or oversold.

Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals.

Indicators can be used on all time frames, and have variables that can be adjusted to suit each trader's specific preferences. Indicators can also be used on all markets, and on all chart types.

How do you identify Indicators?

Indicators are typically displayed as a line or histogram beneath a price chart. The line or histogram represents the indicator value for each bar or candlestick on the price chart.

Indicators can also be displayed as a line chart or histogram beneath a price chart. The line or histogram represents the indicator value for each bar or candlestick on the price chart.

Types of Indicators

Here's a list of some common indicators:

  • Trend
  • Volume
  • Moving Averages
  • RSI (Relative Strength Index)
  • MACD (Moving Average Convergence Divergence)
  • Stochastics
  • Bollinger Bands

Trend

A trend is the general direction of a market or of the price of an asset, and trends can vary in length from short to intermediate, to long term. Short-term trends are generally considered to be those lasting less than a year, intermediate-term trends are those lasting one to three years, and long-term trends are those lasting more than three years. Trends can also be identified as secular (for long-term trends), primary (for medium-term trends), and secondary (for short-term trends).

Trends are often measured and identified by "trendlines." Trendlines are lines drawn on a chart to indicate the direction of the trend. Typically, trendlines are drawn below price in an uptrend and above price in a downtrend.

Volume

Volume is the number of shares or contracts traded in a security or an entire market during a given period of time. For every buyer, there is a seller, and each transaction contributes to the count of total volume. That is, when buyers and sellers agree to make a transaction at a certain price, it is considered one transaction. If only five transactions occur in a day, the volume for the day is five.

Volume is an important indicator in technical analysis because it is used to measure the relative significance of a market move. If the markets make a strong price movement, then the strength of that movement depends on the volume for that period. The higher the volume during that price move, the more significant the move.

Moving Averages

A moving average is a technical analysis indicator that helps smooth out price action by filtering out the “noise” from random price fluctuations. A moving average (MA) is a trend-following or lagging indicator because it is based on past prices. The two main types of moving averages are:

  • Simple Moving Average (SMA)
  • Exponential Moving Average (EMA)

Moving averages are used to identify trends and reversals, as well as to set support and resistance levels. Moving averages can be used on their own to signal buying and selling opportunities, or they can be used in conjunction with other signals.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100.

The RSI is considered overbought when above 70 and oversold when below 30. Signals can be generated by looking for divergences and failure swings. RSI can also be used to identify the general trend.

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA.

Stochastics

Stochastics is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. Stochastics is based on the idea that during an uptrend, prices will stay at or above the closing price of the previous period. During a downtrend, prices will stay at or below the closing price of the previous period.

Bollinger Bands

Bollinger Bands are a technical analysis tool that measures and visualizes volatility by placing a set number of standard deviations away from the moving average. Bollinger Bands are based on a simple moving average that is surrounded by an upper band and a lower band. The upper and lower bands are calculated by adding a set number (usually two) of standard deviations (a measure of volatility) to the moving average.

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