All About Technical Indicators
The values obtained are used to create various patterns that may be added to a chart and allow traders to forecast probable price changes and, therefore, probable times at which to open a buy or sell position in addition to when they should close current open positions.
There are many technical indicators; however, here are the most common types:
- Moving Averages show the average price within a defined time period by considering the most recent closing prices over the given time period and the result is then divided by the number of prices used in the calculation:
For example: In a 10-day moving average, the last 10 closing prices are added together and then divided by 10.
- There are four types of Moving Averages: Simple MA, Exponential MA, Smoothed MA, and Weighted MA. They differ from each other only in terms of the weight coefficients that are assigned to the latest data.
- Moving averages are used to define areas of support and resistance, entry points into the market, to emphasize the direction of a trend, and to smooth out price and volume fluctuations.
- The direction of the indicator shows whether a bullish or bearish trend is present in the market at the moment.
- With two or more moving averages applied to one chart, the further apart they are from one another the stronger the indication of the current trend.
- When the moving averages intersect, this confirms the change in a trend. It is only a confirmation because the change of this indicator is late in comparison with a price change.
- Oscillators are designed to indicate a possible change in the trend of a specific trading instrument by showing whether the instrument is either overbought or oversold, therefore allowing traders to determine when a change in the current overall trend will occur and in turn, an entry point into the market.
- The Stochastic oscillator is used on the trending markets. If both lines top out in the upper zone [above 80% mark (sell signal)] and then the indicator returns to the middle zone, the rate would move in the same direction. If both lines bottom out in the lower zone [below 20% mark (buy signal)] and then the indicator returns to the middle zone, the rate would move in the same direction.
- A dot placed below the price is deemed to be a bullish signal, causing traders to expect the momentum to remain in the upward direction. Conversely, a dot placed above the prices is used to illustrate that the bears are in control and that the momentum is likely to remain downward.
- Short for Stop And Reverse is a very complicated predictive algorithm designed to establish a trailing stop-loss level for asset markets that follow strong bullish or bearish trends.
- Is a technical indicator that is used by many traders to determine the direction of an asset’s momentum and the point in time when this momentum has a higher-than-normal probability of switching directions.
- One of the most important aspects to keep in mind is that the positioning of the “dots” is used by traders to generate transaction signals depending on where the dot is placed relative to the asset’s price.
- A dot placed below the price is deemed to be a bullish signal, causing traders to expect the momentum to remain in the upward direction.
- Trading instruments usually retrace the previous day’s trades. The most popular retracement is the Fibonacci Retracement indicator which is a chart tool used to determine the support and resistance levels of an instrument.
- The Fibonacci Retracement levels are created by drawing a trend line between two extreme points and then splitting the vertical distance according to the specified percentages.
- The Fibonacci Retracement can include up to 13 lines. In order to find these retracement levels, you need to identify the recent Swing Highs and Swing Lows (extreme changes in the trend direction).
Support and Resistance
- When the market moves in a specific direction and then pivots and changes direction, the highest point that was reached before the market changed direction is called the Resistance Level. In the same way, the lowest level the market reaches before the market pivots is called the Support Level.
- It is important to note that if the market passes through a resistance level, then that resistance level can also become a new support level. The same applies in the opposite direction. Previous resistance and support levels are also used as an indicator for future pivots and therefore possible entry points into the market.
Once you have familiarised yourself with the information and concepts, you can open a Demo Trading Account to practice what you have learnt and build on your knowledge and understanding of how to trade successfully. Treat your demo account as you would your real account.