Technical analysis indicators analysis tools that can help traders and investors better understand and act on price movement. There are 100s of technical analysis indicators available that analyze trends, provide price averages, measure volatility and more. In this article, we’ll give a brief description of some of the most popular technical analysis indicators that can be useful in any trader’s market analysis.
Moving averages are one of the famous part of technical analysis indicators. Moving averages filtering out market noise and emphasizing the direction of the trend. As it’s based on past price data, it’s a lagging indicator. The most reliable Moving Averages are Simple Moving Averages and exponential moving average (EMA)
Moving averages provide support and resistance for falling prices and rising prices. For investors and trader, the 200-day, 100-day, and 50-day simple moving average are a popular choice.
Moving averages are lagging indicators as they are based on the previous price. As a result, the longer the moving average the greater the lag.
By plotting a 200-day and 50-day MA on a chart, a buy signal occurs when the 50-day crosses above the 200-day. A sell signal occurs when the 50-day drops below the 200-day.
Bollinger Bands, one of the most popular indicators, is an envelope around stock price indicating the price range of the stock based on stock volatility. They are made up of three lines – an SMA (the middle band), and an upper and lower band.
When price moves towards the upper band it is often considered as overbought and when it is near lower range it is considered as oversold. As volatility increases and decreases, the distance between the band’s increases and decreases as well.
Bollinger Band indicates volatility around the price of a stock. When price reaches the upper band it is considered as overbought and could be a good exit point and when the stock approaches lower band it is considered as a good entry point
For the most, the price will stay within the bands, but on rare incidents, it may break above or below them. While this event may not be a trading signal in itself, it can act as an indication of extreme market conditions.
Relative Strength Index (RSI)
The RSI is a momentum indicator that shows whether a stock is overbought or oversold. RSI calculates the strength of a stock trend and helps to predict their reversals. It does this by measuring the magnitude of recent price changes (the standard-setting is the previous 14 periods – so 14 days, 14 hours, etc.). The data is then displayed as an oscillator that can have a value between 0 and 100.
RSI value oscillates between 0 to 100.
RSI ABOVE 50 = BULLISH MOMENTUM
RSI BELOW 50 = BEARISH MOMENTUM.
When RSI value is above 70 it is considered as overbought and when RSI is below 30 it is considered as oversold. Some traders use 75/25 or even 80/20 to define overbought and oversold.
Uses of RSI
1. Identify overbought stocks.
2. Identify oversold stocks.
3. Identify trend reversals.
4. Identify the direction of the trend.
5.Excellent tools for swing traders
Moving Average Convergence Divergence (MACD)
The MACD is used to determine the momentum of stock by showing the relationship between two moving averages. MACD is calculated by subtracting fast 26 EMA and a slow 12 EMA. This is then plotted over the MACD line’s 9 EMA – the signal line. Many charting tools also often incorporate a histogram, which shows the distance between the MACD line and the signal line.
MACD is popular because it is one of the most reliable and easy to use technical indicator. Even though it is a lagging indicator, it provides a signal before moving average cross over. MACD gives a signal for trend continuation and reversal, therefore, used both by bulls and bears
The major component of MACD
1. MACD line- It’s a graphical representation of difference of fast EMA and slower EMA
2. MACD Signal line- 9 periods EMA of the MACD line.
3. Zero Line- It is a constant line with default zero lines.
4. MACD Histogram- It is a plot of the difference between the MACD line and a signal line.