Technical analysis is used for forecasting price movements based on the past movements of the prices on the charts.
Technical analysis involves putting various technical parameters like price, volume, open interest, etc. on the charts.
It provides us with a set of technical tools and indicators that helps us in analyzing these price movements on the charts.
Technical indicators as used for analyzing the price movements on the charts and help us analyzing whether the ongoing trend will continue or reverse.
Technical indicators also help us in analyzing whether the ongoing trend has the strength to continue the further movement.
Nowadays there are many technical indicators that help us in analyzing the price movements of the stocks.
In this blog, we will be discussing the Top 7 Technical Analysis Indicator for successful trading:
1. Moving Averages:
The moving Average indicates the traders whether to buy or sell the stocks.
The moving Average is a trend indicator that helps us in knowing whether the current trend is uptrend or downtrend.
There are different types of Moving Average like Simple Moving Average (SMA), Weighted Moving Average (WMA), and Exponential Moving Average:
SMA: It is a type of moving average that is calculated by adding up the closing price of stocks for the specific number of periods and then dividing it by that number of periods.
WMA: In this type of moving average weights are given to the most recent closing prices. For example, if we calculate WMA for 5 periods, then the formula will be:
WMA = (P1 * 5 + (P2 * 4) + (P3 * 3) +…….+ (P5 * 1) / (5 + 4+ 3 + 2 + 1) where P1,P2…are different stock closing prices.
EMA: It is a type of moving that is calculated in the same way of WMA but here prices increase exponentially.
2. Moving Average Convergence and Divergence (MACD):
This is another trend following indicator that shows the relationship between the two moving averages of the stock.
This indicator consists of the fast line and slow line.
The fast MACD line is calculated by subtracting the 26 periods EMA from the 12 periods EMA and the slow line is 9 period EMA.
When the fast line falls below the slow line, it generates a bearish signal and when the fast line is above the slow line then it generates a bullish signal.
3. Relative Strength Index (RSI):
This is a momentum indicator that indicates whether the stock is in overbought or the oversold zone.
This indicator indicates that the stock is overbought when the RSI is above 70 and indicates that the stock is oversold when the RSI is below 30.
The traders should be cautious when the stock is trading in the overbought or oversold zone as the trend may reverse from there.
4. Stochastic Oscillator:
Developed by George Lane, this is another momentum indicator.
This indicator also indicates if the stock is in the overbought or oversold zone and moves between 0 and 100.
This indicator indicates that the stock is overbought when it is above 80 and indicates that the stock is oversold when it is below 20.
5. Parabolic SAR:
This technical indicator helps us is analyzing whether the ongoing direction of the prices will continue or it is going to reverse.
A series of dots are placed above or below the bars on the charts.
When the trend is up then the dots are placed below the bars and when the trend is going then the dots are placed above the bars.
If the trend gets reversed then the dots also get reversed and indicate that price reversal is going to take place.
6. Average Directional Index (ADX):
This is a trend indicator and shows us the momentum as well as the strength of the ongoing trend.
Average Directional Index indicator is mainly used for assessing the strength of the ongoing trend.
If the ADX Value is between 0-25 then it indicates the ongoing trend is weak, ADX Value 25-50 indicates a strong trend, a value between 50-70 shows a very strong trend and a value 75-100 indicates an extremely strong trend.
By looking at these ADX values, traders can determine whether the trend is strong or not.
Aroon is a technical indicator that is used for measuring if a stock is trending or not.
It is mainly used for indicating when the trends are going to reverse.
It consists of the “Aroon up” line that measures the uptrend strength and the “Aroon down” line that measures the downtrend strength.
The above indicators as discussed above help the traders to analyze the movement of the stock’s prices and helps then in taking trading decisions like whether to enter or exit the stocks. Traders can also use a combination of two technical indicators like RSI and MACD for analyzing the movement better. They can also use these indicators to confirm any pattern formation on the charts.
Sakshi Agarwal is a post graduate from a financial background. Her favorite topics of interest to write about include technical analysis and investing. She is currently working at www.elearnmarkets.com as a research analyst.