Technical Indicators

What Are Technical Indicators?

Technical indicators are used by traders to interpret market signals and forecast future price movements. They are typically plotted as a line on a price chart. While there are hundreds of indicators, they can be broadly grouped into two categories: trend-following and oscillators.

Trend-Following Indicators

These indicators are designed to identify the direction and strength of a market trend. They are known as lagging indicators because they confirm a trend after it has already started.

• Moving Averages (MA): A moving average smooths out price data to form a single flowing line, making it easier to identify the trend direction. The 50-day and 200-day moving averages are very popular.
• Moving Average Convergence Divergence (MACD): This is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.

Oscillators

Oscillators are designed to identify overbought and oversold conditions in the market. They typically fluctuate between two extremes. They are most effective in range-bound, non-trending markets.

• Relative Strength Index (RSI): A momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally, an RSI above 70 is considered overbought, and an RSI below 30 is considered oversold.
• Stochastic Oscillator: This oscillator compares a particular closing price of a security to a range of its prices over a certain period of time.

The Danger of Over-Reliance

While indicators can be useful tools, it is dangerous to rely on them exclusively. They are all based on past price data and are therefore lagging by nature. Many successful traders use indicators as a supplementary tool to confirm the signals they see in the price action itself.