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Why Use Technical Analysis Indicators when Trading?

Trading indicators are mathematically calculated patterns that are plotted on a chart, particularly in candlestick’s shape. Therefore, these indicators help the traders in determining the direction in which prices are mostly like to move in the market.

The trading indicators are divided into two categories: leading indicators and lagging indicators.

  • A leading indicator is used to forecast future price movements.
  • A lagging indicator is used to analyze past trends.

In this article, we have listed down different technical indicators that are important to analyze an asset’s momentum in a particular direction with an aim to capture maximum gains.

Best Trading Indicators

1. Moving Average (MA)

Moving average is also referred to as simple moving average (SMA), it is used by traders to determine the direction of current price movements. However, it does not include short-term price spikes. The indicator presents a single trend line by combining the price points of a security over a specific time period and dividing it with a number of data points.

The data under analysis depends on the length of the MA. For instance, a 100-day MA requires 100 days of data. The MA indicator also helps in studying the support and resistance levels.

2. Stochastic Oscillator

A stochastic oscillator compares an asset’s closing price to a price range over time. This indicator helps in presenting momentum and trend strength by using a scale of 0 to 100. The price points below 20 represent an oversold market and points above 80 is show an overbought market.

3. Moving Average Convergence Divergence (MACD)

MACD helps in detecting any changes in momentum by comparing two moving averages. The purpose is to help traders to analyze support and resistance levels for possible buy and sell opportunities.

In this indicator, there are two things to notice – ‘convergence’ that shows two moving averages are approaching together – and ‘divergence’ that shows averages when moving away from each other. Convergence indicates a decrease in momentum while divergence indicates an increase in momentum.

4. Bollinger Bands

A Bollinger band indicates a price range within which an asset usually trades. The increase and decrease in the width of bands reflect recent volatility. Therefore, the narrower the bands are to each other the lower is the perceived volatility while the wider the bands are the higher the volatility.

Bollinger bands are commonly used to forecast long-term price movements. Also, helps in indicating when an asset trades outside the usual levels. So when an asset price constantly moves outside the band’s upper parameter, it could be overbought, and when the price moves below the lower parameter, it could be oversold.

5. Relative Strength Index (RSI)

RSI helps traders in identifying momentum, market trends, and warning signs for a dangerous price movement. It is presented as a point between 0 and 100, where an asset around 70 is considered overbought and near 30 it is considered oversold.

An overbought sign denotes that short-term gains may be reaching maturity and assets may be in for price correction. Whereas an oversold sign could denote that short-term declines are near maturity and assets may be in for a rally.

Feel free to contact us to know more about trading indicators and for guidance of trading strategies.

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