What is a Stock Market Technical Indicator?
May 18, 2017
A stock market technical indicator is a series of data points that are derived from the application of a formula to the price data of a security.
Technical indicators serve to predict the future price levels, or simply the price direction of a security by examining the past patterns.Technical indicators can be developed using only core elements of chart analysis, such as patterns and mathematical functions.
Stock market technical indicators are mostly used by active traders to analyze short-term price movements. They offer a different perspective from which to study price action.
The following are some of the top stock market technical indicators:
Support and resistance
These barriers are used by stock traders to establish the ideal time to enter or exit the market. Besides, they give clues about the direction of the market. The unique thing about these technical indicators is that they do not become obsolete as they are caused by human nature. Support and resistance have always been and will always be a natural occurrence in all liquid markets.
Price action in conjunction with moving average and support and resistance helps traders to go with the trend and identify the path of least resistance.
Volume serves as an effective indicator of the conviction of traders. Volume placed in context with price movement, allows one to trade effectively. In order to measure the significance of volume, a trader needs a baseline to establish the percentage change over an average day.
This stock market technical indicator helps traders to identify a change in trend. They measure buying and selling pressures by assuming that no commodity can sustain an upward or downward trend without consistent buying and selling pressure.
Relative strength index (RSI)
This is a great tool that helps trades to time their trading signals. When a stock is overbought, the RSI will show a level above 70 and a stock is oversold if the RSI indicates a level below 30.
These tools identify periods of high and low volatility for stock. Besides, they can be used to identify the trend of a stock. Together with moving averages, a trader can use these bands to identify support and resistance.
Why use stock market technical indicators?
The core purposes of technical indicators is to alert, confirm and to predict.
Technical indicators alert traders to study price action keenly. If momentum is warning, it may be a signal to watch for a break of support. A momentum warning signifies the likelihood of a break of support while a large positive divergence building indicates the possibility of a resistance breakout.
A trader can utilize technical indicators to confirm other technical analysis tools. In the event of a breakout on the price chart, an equivalent corresponding moving average crossover can confirm the breakout. On the other hand, if a stock breaks support, an equivalent low in the On-Balance-Volume (OBV) could serve to confirm the weakness.
Securities traders can use technical indicators to predict the direction of future prices.
Stock market technical indicators help traders to make trading signals. With the right method, traders can use the indicators to signal trading opportunities and come up with effective strategies.