The Types of Trading Indicators

If you track stock market activities daily, understanding the basics of technical trading indicators can prove to be very valuable. One may argue that focusing on the basal fundamentals of a company is the route to successful trading. While the approach is correct, nonetheless, learning about how the types of indicators in the stock market work can provide impetus to new and exciting trades.

What are Trading indicators?

Trading indicators are mathematical computations plotted as lines on a price chart that aid traders in identifying certain signs and trends in the stock market. They are simply a set of tools applied to a trading chart to demystify the market and make a clearer analysis.

What are the types of indicators?

To make adept decisions regarding which trading indicators suit your trading strategy, you need to first employ knowledge and adequately assess your risk appetite. The most popular indicator types for retail traders include:

1. Moving average (MA)

   The moving average, also known as Small Moving Average, is a price trend indicator that balances the price data by providing regular updates of the average price. This technical analysis approach combines the price points of financial instruments, over a specific duration. The MA indicator generates a trend line, thereby wiping out any fluctuations caused by random price surges.

   MAs help traders identify trends and form a key part of their trading methods. If the current price is above a moving average, it signals that long bets should be considered; however, if the price action is below the moving average, it implies that you can consider short bets.

   Using moving averages to identify which side of the market to trade on any specific day may be a quick and straightforward approach. However, there is no guarantee when it comes to using technical indicators in financial markets. They are not trading advisers that advise you which way to trade, even though they are quite beneficial and provide insight. Moving averages, however, may be extremely effective as a trading method when coupled with other trading indicators.

2. Exponential moving average (EMA)

   It is more sensitive to fresh information than the SMA because the most recent data points are given a higher weightage when computing EMA. You can also use exponentially weighted moving averages. This is because EMAs are extremely sensitive to recent price fluctuations.

   In a nutshell, the most often used EMAs are 12 and 26 days, while 50 and 200 days are employed as trend indicators. Additionally, these oscillators in conjunction with other indicators confirm and analyze the legitimacy of large market shifts.

3. Moving average convergence divergence (MACD)

   MACD detects changes in momentum by comparing two moving averages. Levels of support and resistance can help spot possible buy and sell opportunities.

   When two moving averages diverge, they are said to be convergent; when they converge, they are said to be divergent. This implies that momentum is decreasing when moving averages are converging, but increases when moving averages are diverging.

   This is a type of oscillating technical analysis indicator that swings inside a band over time (above and below a centerline; the MACD fluctuates above and below zero). The MACD indicator can be used for both trend-following and momentum purposes. The MACD lines must be above zero for an extended period to indicate that the stock is likely to increase.

4. Relative strength index (RSI)

   The Relative Strength Index (RSI) is another oscillating indicator that traders use to assess market momentum, market conditions, and warning signs for potentially hazardous price changes. Its value spans from 0 to 100, thus providing a different kind of information than a MACD indicator would provide. Generally, an asset reaching the 70 levels is considered to be overbought, whereas an asset around the 30 levels is considered to be oversold by the market.

   Short-term gains may be fading, and assets may be ready for a market correction as a result of an overbought signal. In contrast, an oversold signal may imply that short-term falls have stopped and assets are poised for a rally.

   Trading indicators like trendlines and moving averages can be used to determine the direction of the trade as well as the direction in which to trade.

   Relative strength index (RSI) The Relative Strength Index (RSI) is another oscillating indicator that traders use to assess market momentum, market conditions, and warning signs for potentially hazardous price changes. Its value spans from 0 to 100, thus providing a different kind of information than a MACD indicator would provide. Generally, an asset reaching the 70 levels is considered to be overbought, whereas an asset around the 30 levels is considered to be oversold by the market. Short-term gains may be fading, and assets may be ready for a market correction as a result of an overbought signal. In contrast, an oversold signal may imply that short-term falls have stopped and assets are poised for a rally. Trading indicators like trendlines and moving averages can be used to determine the direction of the trade as well as the direction in which to trade.

5. On-balance-volume (OBV)

   The on-balance volume (OBV) is a valuable indicator that incorporates a vast amount of volume information and compiles it into a single one-line indicator. It calculates cumulative purchasing and selling pressure by adding volume on "up" days and subtracting volume on "down" days. Ideally, the volume should confirm trends. If the price rises, the OBV should rise as well and vice versa.