In the stock market, data is everything. If you are going to want to find success and profit, you need to be able to study a graph (whether it be bar or candlestick) and know what it’s telling you. This is because the charts actually tell you what a stock is doing. With this information, you can see when a stock is building momentum or swinging wildly and can use this to make a decision on where to position yourself.
One aspect of technical analysis that is often questioned is the use of technical indicators. Some people think they are very useful and offer a better calculation of a price’s average, whereas other believe they’re a waste of time and don’t share any useful information.
If you don’t know what technical indicators are or how they are useful, all will be explained in this article. With this information, you can make a decision as to what use you believe technical indicators have in the stock market.
What is a Technical Indicator?
In their simplest form, technical indicators are data points on a price chart. They are little points that are calculated using the price data and there are various formulas that can be used. Before going on, it is also important to understand that there’s two different types of technical indicators: leading and lagging. The two are very simple. Leading technical indicators lead the price action, whereas lagging indicators follow the price action. When calculating the indicator, various values are taken from the price data, including open, close, high and low information. The volume is also included occasionally. But, what exactly do these technical indicators offer?
What is the Point of a Technical Indicator?
The main point of a technical indicator is to offer an alternative perspective on the price action. The two different types of indicators are supposed to tell you various information about the price of a stock and possibly when a big event is about to happen. They can be used for different things and there are different indicators to do different jobs. For example, moving averages are simple formulas and measure the average price of a stock over a period of time, whereas stochastics are more complex.
How Would You Use a Technical Indicator?
There are many different ways you could use a technical indicator, and investors tend to use them differently. However, it is important to know that you shouldn’t rely on technical indicators completely and should always look at the data as a whole. Apply them to your technical analysis but not never use them on their lonesome.
- To alert – Some traders use technical indicators are an alert system. They can indicate when there is a lot of change happening in a stock’s price and can provide some insight into what’s going on.
- To confirm – Technical indicators can help confirm other technical tools. They can be used to confirm breakouts and can offer support for other fluctuation picked up using other analysis.
- To predict – Some traders use indicators to predict the pattern of stocks, but this is a little risky.
Technical indicators do offer some insight into technical analysis but don’t show anything more about the data. Some traders believe they help simplify the analysis and offer an additional insight into the movement of a stock. Others think they’re a waste of time. Although they provide no extra information about a chart, they do help when it comes to alerts and confirming movements. If you have a specific strategy and if indicators are working for you, then continue to use them. The preference is entirely subjective.