Skip to content

Technical Indicators that Every Trader should be aware of

What are technical Indicators?

A technical indicator in finance is produced mathematically using trading volume, historical price, open interest data, and sentiment data and used to evaluate stock market patterns and investment decisions in technical analysis. Technical indicators are a fundamental component of technical analysis and are often displayed on a chart pattern to forecast market trends. They are used in technical analysis to assess a security’s strength or weakness by focusing on price movements, patterns, or trading signals, as well as other analytical charting tools. Indicators often overlay on price chart data to suggest where the price is headed or if the price is “overbought” or “oversold.” Technical indicators may be used to make trading choices by evaluating them alone or in combination. By evaluating price movements and chart patterns for potential trading opportunities, these indicators attempt to reflect market psychology and mood. Back-testing new indicators using historical price and volume data is common to evaluate how effective they would have been in predicting future occurrences. Traders should use caution when relying entirely on indicators, as they are not failsafe.

Technical Indicator Types

  1. Momentum Indicators
  2. Trend Indicators
  3. Volume Indicators
  4. Volatility Indicators
  5. Breadth Indicators

    1 .Momentum indicator
    Market trading is an intriguing activity that can be both fun and difficult. However, in order to make substantial earnings and build a portfolio, you must trade regularly and learn to analyse trading charts and patterns. You should also be familiar with the numerous technical indicators and use them appropriately in your trading. Momentum indicators, also known as oscillators, are often represented by a line that oscillates about 100.

The indicators depict price movement over time and the strength of such movements, regardless of whether the price goes up or down. Momentum indicators are particularly valuable since they assist traders and analysts in identifying moments when the market may and will reverse. As momentum indicators reveal the relative strength of price action but not the directionality of the price movements, they are best used in conjunction with other technical indicators that display price trends and directions. Price movement, closing price and current price are the three key components used to evaluate a stock’s momentum.

Some prominent momentum indicators that traders use to gauge the pace of prices are listed below:

Moving Average Convergence Divergence (MACD)

MACD was established by Gerald Appel in the 1970s as a momentum indicator to highlight the relationship between the direction, strength, momentum, and duration of a trend in the price of security. It is depicted on the chart as two lines that vary indefinitely. The intersection of the two lines generates trading signals similar to a two-moving average strategy. The indicator is a set of three-time series parameters which are the MACD series and the avg. series, and the divergence series which is the difference between the two. The MACD is computed by subtracting the exponential moving average (EMA) of 26 days from the EMA of 12 days. The MACD line is the result of the calculation. The signal line, a 9-day EMA of the MACD, is then placed on top of the MACD line and can serve as a trigger for buy and sell. Traders/investors may go long on the security when the MACD goes beyond its signal line and sell—or short—the security when the MACD crosses below the signal line.

Relative Strength Index (RSI)

The Relative Strength Index, short RSI is a well-known and commonly used momentum oscillator created by the well-known J. Welles Wilder. The Relative Strength Index gauges the rate and magnitude of market price swings. The RSI oscillator readings, which swing between zero and 100, are normally monitored over a 14-day period but can be reduced to enhance sensitivity or raised to lower sensitivity. When the Relative Strength Index falls below 30, the market is in an oversold condition, and when it rises beyond 70, the market is in an overbought condition. They seek signs of weakening or growing momentum in a market’s short to medium-term price fluctuations. Short-term market fluctuations that give trading opportunities are sometimes followed by overbought or oversold circumstances. The divergence between price and RSI may also be used to identify probable reversals.

RSI = 100 – [100 / ( 1 + (Avg. of Upward Price Change / Avg. of Downward Price Change ) ) ]

Average Directional Index (ADX)
The Average Directional Movement Index, or ADX, can be used to gauge the overall strength of a trend, irrespective of its direction. The ADX is a component of Welles Wilder’s Directional Movement System. This technique employs the DMI+ and DMI- indicators, as well as the ADX, to assess the strength of price movement in both positive and negative directions. The ADX, the Minus Directional Indicator (-DI), and the Plus Directional Indicator (+DI) were created by the author as a group that could be used to assist monitor both the velocity and direction of price changes. The ADX is calculated using the smoothed averages of the -DI and +DI, which are calculated by comparing two successive lows and highs. A reading of 20 or above on the ADX showed that the markets were trending. When the ADX is less than 20, the reading is considered as directionless or consolidated. When the ADX rises, it implies that the market is improving. If the trend has a steady slope, the ADX value tends to flatten out. If the ADX declines, it might mean that the market is getting less directional and that the current trend is fading.

Rate of Change
The ROC oscillator is only a momentum oscillator. The rate of change is the pace at which the prices of stock fluctuate over a specific time period (n days). The Greek letter delta (Δ) is frequently used to represent the ROC. The term ROC is usually used while talking of momentum, and it is defined as a ratio of a change in one variable to a comparable change in another. The rate of change can be +ve or -ve. This corresponds to a change in the y -value between the two data points. The term zero rate of change refers to a quantity that does not fluctuate over time.

(ROC) = {(Today’s CP – CP ‘n’ periods ago) / CP ‘n’ periods ago} x 100

Closing Price = CP

Stochastic oscillator
The Stochastic Oscillator analyses a stock’s current closing price over a specific time period. It measures both the momentum and the rate at which stock prices move, but it ignores the price and volume. It is a leading indication that provides early warning of entry and exit.

The indicator usually consists of two lines: one indicating the oscillator’s actual value for each session, and the other displaying its three-day simple moving average. Because the price is assumed to follow momentum, the crossing of these two lines is thought to be an indication that a reversal is on the way, as it signals a significant shift in momentum from day to day.

The stochastic oscillator is range-bound, which aids in recognising overbought and oversold conditions, and oscillates between 0 and 100. When this indicator exceeds 80, it indicates an overbought zone; when it falls below 20, it indicates an oversold zone. However, they are not necessarily indicators of an upcoming reversal; extremely strong trends can keep overbought or oversold circumstances in place for a lengthy period of time. Rather, traders should look for changes in the stochastic oscillator to predict future trend changes.

Relative Strength
While value investing seeks to add security at cheap prices and sell at high, relative strength investment seeks to purchase at a high and sell even higher. As a result, relative strength investors believe that the market’s present trends will continue long enough for them to earn a profit. Any abrupt reversal of that trend will have serious ramifications for the trader. Since, relative strength investing assumes that present patterns will continue in the future, it works best during periods of stability and limited change.

When the Relative Strength rises, it indicates that the security’s price is outperforming the base security/index in terms of relative performance. When the indicator is going sideways, it indicates that the prices of both assets are growing and decreasing by equal percentages. When the indicator falls, it indicates that the security’s price is underperforming in comparison to the base security/index.

  1. Trend Indicators

Moving Averages
It is a technical indicator that market analysts and investors may use to predict the direction of a trend. It takes the average of a financial security’s data points over a specified time period. It is referred to as a “moving” average because it is constantly recalculated using the most recent price data. Analysts use the moving average to analyse support and resistance by analysing an asset’s price fluctuations. It represents the prior price action/movement of the security. Analysts then utilise the data to anticipate the asset price’s future direction. It is referred to be a trailing indicator because it produces a signal or indicates the direction of a certain trend after the price movement of the underlying asset.

Oliver Seban invented the SuperTrend indicator, which is a trend tracking indicator related to moving averages. It is plotted on pricing, and its location shows the present trend. It is a very simple indicator with only two parameters:  multiplier and period. It also provides buy and sell alerts and is simple to use. The indicator performs well in all periods but excels in higher timeframes. Supertrend, like most trend following indicators, performs best in a moving market but produces whipsaws in a flat or choppy market.  Since it is used to compute the indicator’s value and indicates the degree of price volatility, the average true range (ATR) plays an important part in the Supertrend indicator. The strategy’s default settings are 10 for Average True Range (ATR) and 3 for its multiplier during construction.

Parabolic SAR

  1. Welles Wilder developed the Parabolic SAR as a technical indicator to determine the direction of a stock’s movement. The indication is also known as a stop and reverse system, abbreviated as SAR. The Parabolic SAR is most effective in trending markets. It seeks to identify probable price reversals in traded assets. It can also serve in assisting entry and exit point. This indicator determines where the indicator dots will appear by combining the most recent extreme price (EP) with an acceleration factor (AF).

When plotted graphically on a chart, the Parabolic SAR indicator appears as a sequence of dots. The parabolic SAR is considered as a bullish indicator if it appears below the current price. When it is placed over the current price, it is considered a bearish indication. Stop-loss and profit objectives are determined using the signals. SAR lags behind price as the trend develops over time.

SAR tracks price and might be regarded a trend indicator. SAR acts as a trailing stop when a downtrend reverses and begins to rise. As long as the upswing continues, the trailing stop will continue to climb. In other words, in an upswing, SAR never drops and constantly preserves profits as prices rise. The indication protects against the tendency to decrease a stop-loss. A downtrend begins when the price stops increasing and reverses below the SAR, with the SAR above the price. SAR, like a trailing stop, follows prices lower. As long as the decline continues, the stop will continue to decrease. Because SAR never rises during a slump, it protects gains on short bets all the time.

  1. Volume Indicators

On-Balance indicator
Granville’s New Key to Stock Market Profits, published in 1963, was the first to use the OBV metric. The on-balance volume (OBV) is a technical trading momentum indicator that predicts stock price fluctuations by analysing volume flow. Granville thought that volume was the driving force in markets and created OBV to forecast when large market shifts would occur based on volume fluctuations. The indicator captures long and selling pressure as a cumulative indication that adds volume on the up period and subtracts volume on the down period. When a stock closes above its previous close, the whole volume for the day is termed up-volume. When the security closes below the previous close, the whole volume for the day is called down-volume.
Despite being placed on a price chart and quantitatively assessed, the individual quantitative value of OBV is irrelevant. Analysts use OBV volume figures to track major, institutional investors. The hypothesis underlying OBV is predicated on a contrast between smart money (institutional investors) and less skilled individual investors. Volume may grow if mutual funds and pension funds begin to buy into an asset that regular investors are selling, even if the price stays relatively stable. Volume eventually pushes up the price. At that moment, larger investors start selling, while smaller investors start purchasing.

Volume Price Trend Indicator
VPT also known as The Volume Price Trend Indicator is a stock market indicator that assists traders in determining the relationship between a company’s price and trading volume. It aids in determining the supply and demand for a stock and in projecting the price of a security, both in volume and trajectory. It combines market price and volume to create a hybrid trading indication of the two variables. The indicator’s core idea is to multiply the market volume by the percentage change in price over a specific time. If the price falls, the indicator’s value falls owing to the negative value. When the price rises, the indicator’s value rises as well. The VPT differs from other price-volume indicators in that it considers the percentage rise or drop in price rather than just adding or subtracting volume depending on whether the current price is higher than the previous day’s pricing. The VPT is often calculated daily, although it can be computed over any period for which volume data is available. The indicator is similar to the on-balance volume (OBV) indicator.
When investors / traders examine the VPT, they are often looking for divergences. When the price of a stock moves in the opposite direction of an indicator, this is referred to as a divergence. It typically indicates that the price is about to shift direction.

Chaikin Money Flow Indicator
In the 1980s, Marc Chaikin developed the Chaikin Money Flow (CMF) indicator to track the accumulation and distribution of a security over a given time period. By default, the CMF term is set to 20- 21 days. On a chart, the Chaikin Money Flow is a single line that goes up and down. It is similar to the A/D indicator. The CMF is typically used to validate a trend, assess its strength, or detect future trend reversals or breakouts.

The indication is based on the premise that when the closing price at the end of the trading day is near the top, there is an accumulation, and when the closing price is close to the lowest, there is dispersion.

If the price action continually closes above the bar’s midpoint on growing volume, the Chaikin Money Flow will be positive, vis-a-vis if the price action consistently closes below the bar’s midpoint on increasing volume.

The indicator values vary between +1 and -1. Any crossings above or below 0 can be utilised to indicate changes in money flow as well as buying or selling momentum.

Money flow index
Money flow Index (MFI), sometimes known as volume-weighted RSI, was developed by Avrum Soudack and Gene Quong. MFI is a momentum indicator that tracks the flow of money into and out of an asset over a given time period. The Money Flow Index is a one-of-a-kind indicator that combines momentum, volume, and an RSI indicator. When there is a divergence, the Money Flow Index is useful. This is an indication of a possible reversal in the current price trend.
When the MFI indicator is over 50, the bulls win, and when it is below 50, the bears win. Oversold levels are normally seen below 20 and overbought levels are found beyond 80. Oversold/overbought levels are often insufficient to justify a buy/sell decision, and traders should seek further technical analysis to corroborate the security’s turning point.

The Accumulation Distribution (A/D) Line, introduced by Marc Chaikin, is a volume-based indicator that measures the cumulative flow of money into the security and out of the security. The phrase accumulation refers to the level of buying of security denoting its demand, while distribution refers to the level of selling of security denoting its supply. As a result, one can predict a stock’s price trajectory based on its supply and demand pressure. The indicator line is used to monitor price patterns and perhaps predict future reversals.

Chaikin first referred to the indicator as the Cumulative Money Flow Line. If the price is growing but the indicator is falling, it means that the accumulation volume is insufficient to keep the price rising and that a price decline is conceivable. The multiplier in the calculation reveals how powerful the buying or selling was at a certain period. This is done by determining whether the price ended up in the higher or lower half of its range. This is then multiplied by the volume.

Volume-Weighted Average Price
VWAP stands for volume-weighted average pricing, a weighted average method extensively used by analysts and traders to measure a stock’s demand in terms of volume and price. It takes into account all orders during the day and computes the mean value for calculating purposes. It might be distributed over single or numerous time periods depending on the requirements. It provides traders with a smoothed-out representation of a security’s price over time.

Analysts and portfolio managers use VWAP to filter out the noise created by daily price movements and estimate a reasonable price to purchase or sell securities. Mutual fund portfolio managers use it when they need to acquire a big number of a certain stock while also ensuring that their trades do not significantly impact the price of the securities they are attempting to buy or sell.

Traders employ VWAP in a variety of ways. Traders may use VWAP as a trend confirmation tool and develop trading rules around it. VWAP provides traders with important information about a stock’s price movement, such as identifying the exact point in a time series where the movement lies. When the quote of security is above the VWAP indicator line, the market is said to be in an uptrend; when the quote of security is below the VWAP line, the market is said to be in a downtrend.

Volume at Price
Volume by Price is best suited for identifying possible support and resistance when prices are above a long bar and when prices are below a long bar. The indicator displays the volume for a certain price range based on closing prices. To coincide with these price ranges, the bars are horizontal and presented on the side of the chart.

Furthermore, the bars are colored to highlight how much volume was positive (in green) and how much was negative (in red). Long green segments with high volume imply increased demand, which can further verify support. Long red segments indicate higher supply, which may be used to confirm resistance. It is critical to validate Volume-by-Price conclusions using additional indicators and research methodologies. This volume-based indicator works well with momentum oscillators and chart patterns.

Price breaks beyond or below long-term trend Volume by Price bars can also be used to generate signals. Breaking over a lengthy bar indicates that demand was strong enough to overcome a supply overhang. Similarly, a break below a lengthy bar indicates weakness since supply was sufficient to outnumber demand.

  1. Volatility Indicators

Bollinger Bands
The Bollinger band is a statistical technique created in the 1980s by famed technical analyst John Bollinger for generating oversold or overbought signals. The Bollinger band is composed of three lines – the upper, middle, and lower band – and is calculated using two variables: period and standard deviation (SD).

The bands are a volatility indicator that calculates the relative high and low of an underlying asset price with respect to past trades. SD is a measure of volatility that fluctuates when there is an increase or decrease in volatility. When the price rises, the bands broaden; when the price falls, the bands shrink. The trader determines how many SD the volatility indicator should be set at. The distance between the central and upper and lower bands is determined by the number of SD.

The band in middle is the moving average, and its parameters are set by the trader. The positioning of these bands indicates how steady the trend is and the probable low and high price levels that can be predicted in the near future.

Furthermore, the pair of bands is not designed to be used separately. Use the pair to corroborate indications provided by other indicators. The default settings for period and SD are 20 and 2, respectively, but you can change the combinations.

Keltner Channel
American grain trader Chester Keltner established the “Ten-Day Moving Average Trading Rule” in his 1960 book, How to Make Money in Commodities, which is considered the original form of Keltner Channels. Keltner Channels is a well-known technical indicator that day traders use to identify reversals with channel breakouts.

The original version of the indicator began with a 10-day Simple Moving Average (SMA) of the usual price (H+L+C)/3) as the centerline. Linda Bradford Raschke introduced the latest form of Keltner Channels in the 1980s.

The Keltner Channel is a volatility-based indicator made up of three distinct lines. The centre line shows the price’s exponential moving average (EMA). The top and lower bands are set to two times the Average true range (ATR). This indicator is similar to Bollinger Bands in that the bands are determined by the standard deviation. Keltner Channels, unlike Bollinger Bands, set channel distance using the Average True Range (ATR) rather than the standard deviation.

Typically, the channels are created with two Average True Range values above and below the 20-day EMA. The direction is determined by the EMA, while the channel width is determined by the Average True Range. Keltner Channels are a trend tracking indicator that may be used to identify reversals based on channel breakouts and channel direction. When the trend is flat, channels may also be utilised to determine overbought and oversold levels. The direction of the channel aids in determining the direction of trends; for example, when the channel is up, the price is rising; when the channel is down, the price is decreasing.

Donchian Channel
Richard Donchian, a prominent trader, invented the Donchian Channel. The indicator is used by traders to predict possible retracements and breakouts, and volatility in a stock. Donchian channels are typically employed with candlestick charts rather than line graphs so that the channel’s contents can be readily mapped and any following trading indications may be acted on fast. It is beneficial in both trending and ranging markets.

Donchian channels are used by traders to map the momentum in an underlying market, and the indications provided by the channel are used to establish either a long or a short position at any particular time. Donchian Channels three lines are constructed by moving average calculations that include an indication made up of upper and lower bands centered on a midway band. The top line shows the degree of bullish energy by showing the highest price obtained throughout the bull-bear fight. The centre line represents the period’s mean reversion price, illustrating the period’s middle ground established during the bull-bear battle. If an asset is trading near the centre line with no significant deviations toward the upper or lower bands, the market is experiencing minimal volatility and there may not be a clear overall bullish or negative trend. The bottom line shows the degree of bearish energy by showing the lowest price attained throughout the bull-bear struggle. The indicator may be used for forex, equities, options, or futures markets and can be utilised in any period, such as intraday or weekly charts.

Average True Range (ATR)
Average True Range (ATR) was developed by renowned technical analyst J. Welles Wilder Jr. in 1978. The average true range (ATR), unlike other technical indicators, is a price volatility indicator that shows the average price variance of underlying assets over a specific time period. It is the mean of the true ranges throughout the chosen time period. ATR was initially developed for use in commodity markets, but it is currently used for all sorts of securities. The ATR calculation is often based on 14 periods, as advised by J. Welles Wilder, which can be intraday, daily, weekly, or monthly.

An widening ATR implies higher market volatility, with the range of each bar increasing. High ATR levels are generally the consequence of a quick gain or collapse and are unlikely to last for long. The low ATR values imply lower price volatility. If the ATR value remains low for an extended period of time, it may signal the probability of a reversal or continuing move, as well as a consolidation zone. Because the ATR is non-directional, a growing ATR might signal either selling or buying pressure.

  1. Breadth Indicators

Periodic High and Lows
The High-Low Index is a breadth indicator that measures new 52-week highs and lows. Investors and traders use the high-low index to confirm the current market trend of a wide market index. Because the index may be volatile on a daily basis, market experts typically use a moving average to smooth out the daily fluctuations. The Record High Percent is the basis of the high-low index. To assess the index’s trend, the high-low index is a simple moving average of the Record High Percent. The simple moving average is usually a 10-day moving average of the Record High Percent. To attain a clearer view of the fluctuations in the index or market, an average of the Record High Percent is used to smooth out any times of excessive volatility in the index being evaluated. A high-low index is frequently built using indices that are proxies for the entire market.

The advance and decline (A/D) line is a breadth indicator that represents market perceptions in a way, how many securities contributed to the market advance or decline. The A/D line demonstrates the strength of a current trend as well as its potential for reversal.

When major indices are climbing, a rising A/D line reinforces the uptrend and demonstrates robust involvement. If key indexes are climbing and the A/D line is decreasing, it indicates that fewer stocks are participating in the rise and is a sign that the markets are losing breadth, which indicates that the index may be reaching the end of its rally and is referred to as bearish divergence.

When key indices are decreasing, a sliding advance/decline line confirms the down ward trend. If key indexes are decreasing and the A/D line is rising, fewer stocks are declining over time, which may indicate that sellers are losing confidence, implying that the index is nearing the conclusion of its slide and is known as bullish divergence.

It can be computed daily, fortnightly, monthly, quarterly, or according to the needs of the operator.

    No comment yet, add your voice below!

    Add a Comment

    Your email address will not be published.

    Related Posts

    Bullish Strategies   Bull Call strategy Setup of the strategy Buy 1 call at lower...
    Bearish Strategies Bear call spread Setup of the strategy Sell 1 call at lower strike...
    Rising Wedge & Falling Wedge The rising wedge pattern is a technical bearish chart pattern...