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What are Technical Indicators in Technical Analysis? Definition with Examples


Technical Indicator Definition:

In Technical Analysis, Mathematical calculations used to derive the future price of stock, index, forex, currency or commodity based on its historical price, volume or other information data is known as Technical Indicator. Some of the common technical indicators used in financial markets are simple moving average (SMA), exponential moving average (EMA), moving average convergence & divergence (MACD), relative strength index (RSI), stochastic, bollinger bands, parabolic SAR, average directional index (ADX), william’s %R, fibonacci, momentum and trend indicator.

We discussed the moving averages and volume chart patterns in the previous chapter. And in this chapter, we are going to know about various technical indicators that help with their crucial information for a safe and beneficial when trading in stock markets, forex markets, currency markets or commodity markets. There are various types of technical indicators and oscillators, these indicators are classified into varieties of groups. Indicator groups are as follows:

1. Trend Indicators:

Trend indicators are commonly plotted as solid lines on the graph of contributions, and are frequently used in a combination of two or more indicators, selecting different time periods. The Moving Averages and Bollinger Bands are some typical trend indicators.

2. Strength Indicators:

Strength indicators show the strength of the contribution by comparing individual moves of upward or downward successive closing prices. To measure the strength in the market it is mainly determined by the level of activities. The Average Directional Index (ADX) is a typical indicator of strength.

3. Cyclical Indicators:

Cyclical indicators describe the price fluctuations. The theory of Elliott Wave is one of the most famous cyclical theories and through it seeks to determine active cycles and their predicted time to happen.

4. Momentum Indicators:

Momentum indicators determine the vitality of a trend over time. The momentum is shown strongly when the trend begins, then weakens when the trend changes.

Technical Analysis – Technical Indicators and Oscillators:

Let us see some of the important types of technical indicators and oscillators in details:

Wiki Finance pedia - e-learning course on Technical Analysis Wikipedia Chapter - What are Technical Indicators in Technical Analysis? Types of Technical Indicators with Examples

In this above chart patterns, you can see the examples of technical indicators like: simple moving average, exponential moving average, weighted moving average, relative strength index, momentum, moving average convergence & divergence  and Stochastic Indicators.

Relative Strength Index Indicator (RSI Indicator):

The Relative Strength Index, or RSI, is a popular indicator in technical analysis of forex market. RSI continues the trend of prices and expressed in a range of 0-100. If the RSI is 70 or greater, then the financial instrument in question is considered overbought, meaning that the price has raised more than expected in the market and therefore it is advisable to make a sale. However, if the RSI shows a level of 30 or lower, it is understood as a sign that the financial instrument in question is in oversold and due to the sales made by thousands of investors the price falls, and therefore investors can purchase at lower cost.

Stochastic Indicator:

Stochastic is used to indicate overbought situations and oversold on a scale of 0-100. This indicator is based on the observation that in an uptrend, prices tend to rise toward daily highs. Conversely, when prices fall and the trend is down, prices tend to approach daily lows. Stochastic calculations produce two lines, namely, % K and % D. These are used to indicate overbought situations and sales. Divergence between the stochastic lines and the price action is a clear signal to trade forex.

These are essential in any successful negotiation strategy. Stochastic reflects the momentum, and its operation consists of recording the closing price of a currency against its price range during the period. In general, there are two forms of stochastic, the fast and the slow. Slow offers in general fewer false signals, so operators tend to prefer it.

Moving Average Convergence & Divergence Indicator (MACD Indicator):

The MACD (divergence of the average mobile convergence) is a more sophisticated tool, which is based on exponential moving averages or EMAs. The MACD determines two different EMAs; usually a period of 12, offset by a period of 26; and a signal (a 9-period EMA) line is also usually indicated. When the MACD rises above the signal line, it is an indicator of strengthening of the market and vice versa. An important advantage of the MACD is generated by many signs. Its best use is to indicate when a trend is weakening since the MACD will be high and will fall below the signal line. Like the rest of strategies that we are presenting, it should be used in conjunction with other systems.

Simple Moving Average Indicator (SMA Indicator):

The Simple Moving Average or SMA is the average price for a certain period of time (5 minutes, 1 hour, 1 day, etc.) where each of the periods chosen has the same importance on average. SMA is a popular indicator in technical analysis of stock market. For example using the closing prices of the currency pair INR / USD by way of example can be that the pair has closed on the first day at 1.4583, on the second day to 1.4592 on the third day at 1.4597, and on the fourth day 1.4599. Thus the 4-day SMA is 1.4593 (the average of the four previous price).

Exponential Moving Average Indicator (EMA Indicator):

This indicator gives more weight to recent prices relative to the overall average. For example, in a MAT of 20 days, the last 10 days will have more effect on the first 10 days. The aim is to use the most recent data to visualize the trend in a better way.

The discussion will be continued and we will know about few more technical indicators in the next chapter. We will learn and understand bollinger bands indicator,  parabolic SAR indicator, momentum indicator, average directional index (ADX) indicator, william’s %R Indicator and Fibonacci Indicator in next tutorial chapter.

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