When you look at a stock chart on a trader’s trading terminal, you’ll likely see multiple lines running across it. These are known as Technical Indicators – they enable traders to study and assess the price movements of a security.
Indicators are trading systems created by successful traders that can aid a trader’s technical study (candlesticks, volumes, S&R) in reaching a conclusion. They provide assistance with buying and selling, verifying patterns, and at times forecasting trends.
Indicators are divided into leading and lagging, the former usually indicating a reversal or new trend before it takes place. However, caution must be exercised as not all leading indicators provide correct predictions. Alertness is key when using these indicators, as they can often give inaccurate signals; trading experience increasingly helps evaluate their accuracy.
The majority of main indicators are generally classified as oscillators due to their tendency to fluctuate within a certain range. Generally, these oscillations will occur between two extremes – for instance, ranging from 0 to 100. By considering the oscillator’s value (e.g. 55, 70 etc.), an appropriate trading approach can be determined.
Conversely, lagging indicators are slow to react to changes in the market because they indicate when a reversal or trend has already happened. While that can appear worthless at first, it’s still better than not getting a signal at all. Moving averages are one of the most used lagging indicators by traders.
You may wonder why we discussed moving averages before delving into indicators further. This is because it stands on its own as a core concept and is applied in many indicators, for example, RSI, MACD and Stochastic. We thus addressed it separately from the other indicators.
In order to get a better grip on individual indicators, let us first comprehend what momentum is. To explain it simply, this is the speed at which the cost alters.
For instance, if the stock is Rs.100 now and it shifts to Rs.105 the next day and Rs.115 after that, we can deduce that the momentum is strong since the rate of change was 15% in only three days. But if that same 15% variation had occurred over 3 months or so, the momentum would have been much lower. Consequently, a quicker rate of change implies greater momentum.