With any type of investment transaction, investors or speculators, want to trade with the highest profit. Here are the top 5 technical indicators that investors should use in technical analysis.
Moving Averages (MA)
Photo: Moving Average MA
One of the 5 simple, widely used indicators that I like to talk about in technical analysis is the moving average (MA). A moving average is the average price over a specified period of time for a particular stock or commodity.
For example, a five-period MA would be the average of the five-day closing prices, including the current period. If this indicator is for intraday use, the calculation will be based on current price data instead of closing prices.
A buy signal is generated when the price crosses the moving average from below the bullish sentiment, while the inverse is a sign of bearish sentiment, hence the sell signal.
There are very complex versions of MAs, like exponential moving averages (EMAs), volume adjusted moving averages, and linear weighted moving averages.
Moving Average Convergence (MACD)
Photo: Moving Average Convergence (MACD)
The Moving Average Convergence Divergence, or MACD, is a commonly used indicator and was developed by Gerald Appel. The MACD tends to follow a momentum indicator that uses two moving averages and an exponential moving average to determine an asset’s momentum. Usually the MACD line is calculated by subtracting the 26-day EMA from the 12-day EMA.
A bullish signal will be generated only if the MACD number is positive, because the short time EMA is higher (stronger) than the longer time EMA. This signifies an increase in momentum. Similarly, a negative MACD value is indicative of a bearish situation.
If the MACD is negative, it means that the downtrend is losing momentum. There are many ways to explain the movement of these lines such as crossovers; An uptrend crossover is signaled when it crosses above the signal line in the upward direction.
Relative Strength Index (RSI)
Photo: Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a technical momentum indicator. It attempts to determine whether the asset is overbought or oversold in the market, from which it indicates whether the market has topped or bottomed. If the markets have an RSI above 70 called overbought, and below 30 it is called oversold.
RSI can be used to look for divergences and swings of oversold and oversold signals. Divergence occurs in a situation where the asset is making a new high while the RSI is not breaking out of the previous high, signaling an upcoming reversal. If the RSI falls below the previous low, a confirmation for a reversal will be given
For greater efficiency, pay attention to a trending market or another market as RSI divergence is not a good indicator in case of a trending market. RSI is very useful especially when used in addition to other indicators.
Stochastic
Photo: Stochastic
Prominent stock trader George Lane pointed out that, if the price has been in an uptrend during the day, the closing price will tend to settle near the top of the previous most recent price range. Conversely, if the price slips down, the closing price tends to move closer to the lower end of the range. This indicator is used to measure the relationship between the closing price of an asset and the asset in the range at a specified time period. The Stochastic Oscillator contains up to two lines. The %K line and the %D line (signal line), are the smoothed form of the %K value and are arguably more important.
The main signal formed by these two lines is when %K crosses the %D line. A bullish signal is formed. A bearish signal is generated when %K falls through %D in a downward direction. This difference also helps determine the inversion. The shape of the Stochastic bottom and top will also act as a good indicator.
Bollinger Bands
Photo: Bollinger Bands
Bollinger Bands are volatility bands developed in the 1980s by financial analyst John Bollinger. Is a good indicator to measure overbought and oversold conditions in the market. Bollinger Bands are made up of 3 lines: the center line (trend), the upper line (resistance) and the lower line (support). When the price of the commodity is at a volatile level, the bands tend to widen, while in the case of a capped price, there is a contraction.
Bollinger Bands are considered to be very useful to traders who are trying to make a new turning point in the range-bound market, buying when the price falls to touch the lower band and vice versa. However, when the market starts trending, the indicator gives false signals, especially when the price moves out of the range it is trading. Bollinger Bands are said to be suitable for the following low frequency trend.
