It is no doubt that technical analysis is one of the most important areas of focus in trading as it seeks to analyze px and market trends from a historical perspective. Through price charts and other helpful indicators, traders are now able to make sound decisions on whether to buy or sell an asset.

If you are a novice or looking to better those skills, understanding the major technical indicators is vital. In this blog post, we shall discuss – Some of the key indicators that every trader needs to understand and how they should be used.

What is Technical Analysis?

Technical analysis is the assessment of financial market security by certain quantitative aspects such as price and volume over a certain time period. In contrast to fundamental analysis, which emphasizes the overarching financial condition and economic factors of a corporation, technical analysis provides the means of recognizing trends and other price movement indicators through the use of charts and various technical indicators.

Key Indicators in Technical Analysis

1. Moving Averages (MA)

In technical analysis, moving average is one of the most utilized indicators. Moving averages are utilized over a certain time period to determine the overall movement of prices over that period. There are primarily two main types:

• A simple moving average (SMA) which is based on the average price for a given number of periods for instance, a 50-day SMA averages the closing price for the past 50 days only.

• An Exponential Moving Average indicator (EMA): Differs from SMA in its calculation because more recent prices are weighted higher than older ones, thus it is more sensitive to price fluctuations.

How to Use: Moving Averages are often employed by trader’s to gauge the strength of the trend. A positive structure appears when a moving average with a shorter review period for example 10 days M А189 folds above than 20 days MA190 (this is called “a golden cross”) whereas a negative one, if the forward moving average crosses below the backward moving average called (“a death cross”).

2. Relative Strength Index (RSI)

The Relative Strength Index (RSI) is an example of a momentum oscillator, whose purpose is to quantify the speed and the amplitude of defined price developments as a value between zero and a hundred. In general speaking, an RSI that reads above seventy is usually associated with an overbought situation of an asset while an RSI that is reading below thirty means that an asset is in the oversold zone.

How to Use: Market participants utilize the RSI indicator for the determination of the possible price reversal levels. For instance, if the RSI is at 70 and above, it denotes a most likely period to sell or pocket the profits, where as, RSI 30 and below suggests that it is best to buy.

3. Moving Average Convergence Divergence (MACD)

The MACD is a popular momentum strategy based on price development over time and is moreover used to analyze the relationship between two moving averages of an instrument’s price. It is composed of the MACD line and histogram which are the signal line and vertical bars indicating the difference between MACD and the signal line, respectively.

How to Use: MACD and signal line crossovers are watched out for by the traders. A bullish crossover, denoting when the MACD line crosses the signal line from below, is a potential buying opportunity, while a bearish crossover, wherein it crosses from above, indicates a potential selling point.

4. Bollinger Bands

Bollinger Bands consist of a central band (the 20-day Simple Moving Average) that is flanked by two other bands which are positioned at a distance of two standard deviations from the central band. This indicator helps the traders in gauging the volatility and the probable price movements.

How to Use: Touching the upper band of the indicator, price may be considered overbought and the same goes for the lower band which may be regarded as being oversold. Reversal price action is generally awaited, and hence, extremes of the price near the bands are sought.

5. Volume

The term volume denotes the aggregate total of shares or contracts executed on any given security over a particular period. A case in point, high volumes could suggest that there is a great deal of ‘buying’ or ‘selling’ pressure among traders whereas low volumes could imply less demand or interest in trading the instrument.

How to Use: Most traders make use of volume simply for the purpose of supporting directional moves. For instance a stock price is on the increase amid high volumes which is a bullish signal indicating that a strong upward wave is in place. But in contrast, when prices are increasing in value with low volumes recorded, this rather is an indication that the bullish wave is not strong and might even take a turn for the worse.

6. Fibonacci Retracement

One of the techniques most used in trading analysis is the Fibonacci retracement which is defined as a method of predicting into the future the possible levels of pullbacks using the fibonacci number sequence. The most common Fibonacci Retracement Indicate Levels are: 23.6%, 38.2%, 50%, 61.8% and 100% levels.

How to Apply: Fibonacci levels help traders in finding the zones where the prices highly likely will turn and take a different direction. For instance, if the stock moves backward to the level of 61.8% and establishes some fresh support, this would probably be a good buy point.

7. Stochastic Oscillator

The Stochastic Oscillator determines the position of a given asset’s closing price in relation to the lowest low and the highest high in a particular period. It ranges from 0 to 100, with more than 80 being regarded as overbought, while under 20 being respectively dubbed oversold.

Usage: When the price trend is about to revers, traders often look for the divergence between the movements of the stochastic oscillator and the price movements themselves. For example, price makes a new high, if the stochastic makes a lower high, then the move is probably finishing.

Conclusion

One of the most helpful aspects of stock trading is the technical analysis. In this respect, several of the basic indicators such as moving averages, RSI, MACD, Bollinger bands, volume, Fibonacci retracement and stochastic oscillator are among the tools that traders utilize to assess and predict market trends and price movements.

However, while technical analysis reveals a lot of things, it is encouraged to do it together with another analysis and to have a risk control. However, practice, and learning are very important in improving skills and even performance in trading. Good luck in your trades!