A technical indicator is a resource that utilizes technical analysis to study trends and moves of major securities. It can also refer to data points obtained through the application of a formula to a specific security price data. The price data can include open, close, high or low and is usually derived over a specific time period.
Also referred to as technicals, they are a class of metrics derived from the price activity of a particular stock trading at the market. Technical indicators are used to predict the future price or price direction of a security. They utilize past price patterns to chart the data points.
Examples Of Technical Indicators
Some of the common examples of technical indicators include:
i. Relative Strength Index
Helps to show how strong a security is advancing in a particular direction.
ii. Money flow index
This is a volume weighted version of Relative Strength index. It helps to show the changes arising from buying and selling pressure.
iii. Moving Average Convergence Divergence
This is a momentum oscillator based on two EMA’s difference.
iv. Average True Range
Helps to measure the volatility of a security.
v. On Balance Volume
This is a technical that uses price and volume together to display the flow of money in and out of a security.
Types Of Technical Indicators
Technicals are divided into four groups:
Oscillators are a group of indicators which flow up and down especially between upper and lower bounds. Technicals included in this group are Relative Strength Index, Schostics Commodity Channel Index and MACD.
Volume indicators combine price data with volume. This helps to determine the strength of a price trend. Volume indicators include Chaikin Money Flow, On balance Volume and Money Flow.
They overlap price movement and investors have the opportunity of using more than one. Examples are Bollinger Bands and Pivot Points.
d. Breadth Indicators
This type of indicator deals with the wider market. Examples include Advance Decline Line, Trin and Ticks.
Why Use Technical Indicator?
It is important to understand that a technical has three functions;
i. Helps to alert
As an alert tool, it helps to signal certain changes happening in the market. For example you may find that momentum is waning which signals a break of support. If divergence is building up, then technicals help to alert you of an impending resistance breakout.
ii. Helps to confirm
A technical indicator can be used to confirm what other technical analysis tools are relaying. For example On Balance Volume helps to confirm that a security is breaking support.
iii. Used to predict
Technical indicators are the perfect tools for traders and investors to predict price movement of a security. As a result, they provide traders and investors with vital information allowing them to enter and exit trades thus profiting from price movement.
Technical indicators are popularly used by active traders as they help to predict, alert and confirm price movements.
Remember, technical indicators are just tools and so they don’t produce any profits. For you to earn profits, use the technical to analyze the market, implement sound trading strategies and you are good to go.
Before using a technical indicator, learn more about it – what it is, their drawbacks, can it be used to trigger trades and does it provide signals early or late.