Technical indicators are formulas for stock trading activity based on the price and volume of stocks traded. They are pattern-based analyses that are produced based on these measurements and are used by traders to compare historical data of stock movements to predict future trends. This is referred to as technical trading and involves reviewing graphs and charts to find patterns in price/volume changes that inform stock trading strategies.
Indicators are overlays on price/volume data graphs and charts that provide information about stock trading movements by using certain mathematical calculations on the price and volume data. There are four main types of technical indicators:
• Trend – this indicator shows which direction the overall market is moving in, if any. Sometimes referred to as ‘oscillators’, they show movements between highs and lows in prices in the shape of a wave.
• Momentum – shows how strong a trend is for a market and can indicate whether a reversal in direction is likely to occur. This indicator is used mainly to establish when the highs and lows of a stock price have occurred.
• Volume – shows how the volume of trading in a market is changing over time and how many units are being bought and sold of stocks over a given period. This indicator is useful when a stock price changes and a trader wants to know how strong support for that change is in the market. Changes based on a high volume of trades are more likely to be sustained than those based on low volumes.
• Volatility – shows how quickly and how much the price of stocks are changing over a given period of time. Volatility is at the heart of stock trading because without it there would be no price fluctuations and no way to make a profit by trading. The higher the volatility the faster a stock price is changing – this does not tell you whether the price is going up or down only the rate at which it is changing. High volatility means large price moves while low volatility reflects small changes in price.
The point of all these indicators is to give a trader an indication of how prices will move in the future based on current activity in the market so that they can position themselves to make a profit. A trader should be in a position to realize a profit no matter whether the market is moving up or down. They don’t need to know exactly what the market will do but have an understanding of the possibilities and to position themselves to take advantage of them. There are many other technical indicators that are formed from the four major ones outlined above that are used to do this.
