Technical Indicators
What Is a Technical Indicator?
Technical indicators are tools used by traders to help make decisions about buying or selling. These tools are based on patterns or rules that come from the past performance of a stock, including its price and volume, as well as how many people have contracts to buy or sell it.
Traders who use technical analysis look at historical data to try and predict what will happen in the future. They use technical indicators to help with this. Some popular types of technical indicators are the Relative Strength Index (RSI), Money Flow Index (MFI), stochastics, moving average convergence divergence (MACD), and Bollinger Bands. These are all different tools that can give signals about whether it might be a good time to buy or sell.
KEY TAKEAWAYS
Technical indicators are tools used by traders that involve doing some math with the price, volume, or the amount of contracts for a stock or other security. These tools help traders who use technical analysis, which is a way of predicting future prices based on past performance.
People who use technical analysis, sometimes called chartists, use these technical indicators to help them decide when it's a good time to start or stop a trade. They look for these indicators in data that shows how the price of a stock or other asset has changed over time.
There are many different technical indicators that traders can choose from. Generally, these indicators can be grouped into two main types: overlays and oscillators. Overlays are indicators that are applied directly on the price chart while oscillators move above and below a central point or line and are often presented below the price chart. Each type provides different kinds of information.
Understanding Technical Indicators
Technical analysis is a way of looking at trades and investments. It uses things like statistical trends from trading activity, such as price movement and volume, to figure out where trading opportunities might be. Unlike fundamental analysts, who try to figure out what a security is really worth based on financial or economic data, technical analysts look at patterns of price movements, trading signals, and various tools that can help them evaluate a security's strength or weakness.
You can use technical analysis on anything that has historical trading data. This includes stocks, futures, commodities, bonds, currencies, and other securities. In this guide, we'll mostly look at stocks, but remember that you can use these concepts on any type of security. In fact, technical analysis is very popular in commodities and forex markets, where traders focus on short-term price movements.
Technical indicators, also known as "technicals," focus on historical trading data, such as price, volume, and open interest. They don't look at the basics of a business, like earnings, revenue, or profit margins. Technical indicators are often used by active traders because they're designed to analyze short-term price movements. But even long-term investors can use technical indicators to figure out when to buy or sell.
Types of Indicators
There are two main types of technical indicators:
Overlays: These are technical indicators that use the same scale as prices and are plotted right on top of the prices on a stock chart. Some examples include moving averages and Bollinger Bands.
Oscillators: These are technical indicators that move between a local minimum and maximum. They're plotted above or below a price chart. Some examples include the stochastic oscillator, MACD, or RSI.
Traders often use many different technical indicators when they're looking at a security. There are thousands of options to choose from, so traders need to find the ones that work best for them and learn how they work. Traders might also combine technical indicators with more subjective forms of technical analysis, like looking at chart patterns, to come up with ideas for trades. Because technical indicators are quantitative, they can be used in automated trading systems.
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