Technical Indicators

Technical indicators are part of  stock trading basics  in order to predict future price levels, or to predict the general price direction of a security. Technical analysts, do no focus on fundamental factors since they believe that these factors are reflected in the price movements themselves. They are mainly interested in predicting price movements based on past patterns and they use technical indicators in order to do this.

In today’s article we discuss some different indicators that commonly used and few particular favorites among  day traders .

Moving Averages – the moving average is frequently used by traders and it shows the average value of a security’s price (stock trading 101) over a set period of time. They are typically used to measure momentum and to define areas of possible support and resistance. There are different types of moving averages that are used including the moving average convergence divergence indicator (MACD), the simple moving average (SMA), the weighted moving average (WMA), and the exponential moving average (EMA). The MACD is often a favorite and one of the trading tools introduced when first learning how to trade stocks.

Relative Strength Index – also referred to as the RSI, the relative strength index is a technical momentum indicator that compares the magnitude of recent gains to recent losses. It does this in attempts to determine when conditions are either oversold or are overbought for a particular asset. The trader using the RSI should pay attention to large surges or drops in the asset prices because they can reflect false buy or sell signals.

Stochastics Oscillator – this is one of many technical indicators that reflects momentum by comparing a security’s closing price to its price range over a specific period of time. The theory behind this indicator is that prices tend to close near their high in an upward trending market, and conversely, prices tend to close near their low in a downward trending market. (see stock trading basics)

There are numerous indicators that technical traders can utilize and many of them are not meant to be used alone. The best online trading techniques often incorporate several  technical indicators to look for trade confirmations.  Too many indicators at once can become very confusing, this is why as a stock market mentor I suggest introducing one at a time.

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