Technical analysis indicators are used by technical traders in order to make money trading stocks, options, currencies, or other financial securities. These technical indicators are based on the price and the volume of a security and they are used to measure momentum, volatility, trends, etc. Technical analysis indicators are used to confirm price movement, to confirm the quality of stock chart patterns, and to form buy and sell signals. Technical analysis is the business of reading market sentiment, via these indicators, in order to anticipate market-driven price changes as opposed to the eventual state of the market which is always based on fundamentals.
Leaders and Followers, Indicator-wise
When learning about technical analysis indicators, there are two types that you should learn about. These include lagging and leading indicators. The lagging indicator is used during trending periods and it is used to confirm price movements. A leading indicator is typically stronger during those times when trading ranges are either sideways or non-trending. The leading indicator comes before the price movements in attempts to predict future price movements. You can find these indicators on stock charts used for trading.
A Few Examples
There are many technical indicators used by traders and here are a few.
Relative Strength Index (RSI) – this indicator measures a stock’s most recent performance in relation to its historical strength. The number and magnitude of recent and historical up and down closes in compared.
Moving Average – the moving average is also used in technical analysis it is used to find the average value of a security’s price over a set amount of time. Trends of financial assets are tracked using the moving average through smoothing out the price fluctuations of daily price data. There are different types of moving averages including the Simple Moving Average (SMA), the Exponential Moving Average (EMA), the Moving Average Crossover, and the Moving Average Convergence Divergence (MACD).
Candlestick Analysis – candlestick analysis uses candlestick charts that provide advantages over the bar charts. They are much more visually appealing and they clearly illustrate investor sentiment. This provides a much clearer depiction of what is actually occurring in the markets, than if you were to use bar charts.
When studying technical analysis, you will find that there are two main ways that indicators are used to form buy and sell signals. These are crossovers and divergence. Crossovers are reflected in price moves through the moving average, or when two moving averages cross over each other. Divergence occurs when the direction of the indicators trend and the direction of the price trend are moving in opposite directions. What this tells stock traders is that the direction of the price trend is getting weaker.
Trading cues are what short term traders follow in order to profit from the normal price fluctuations of the market. But these technical analysis indicators are also useful for longer time frames. There are various trading strategies that can be profitably applied to stocks. One is to follow and believe in the fundamentals, adopt a contrarian view when the market starts to get crazy, stake out a position to which fundamentals will eventually drive the market, and wait. In doing so a trade still needs to follow technical analysis indicators in order to enter and exit a trade at the most profitable points.
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