Stock Trading and Indicators

If you look closely at the way technical analysis is used in stock trading, you will find that it breaks down into two separate parts. The first part is using charts and chart patterns and the second part is the use of indicators. Indicators are used to analyze many factors such as trends and volatility and are calculations that are based on inputs such as trading volumes and prices. Used in conjunction with charts, they can be used to confirm your findings from the analysis of charts as well as a basis for generating trading signals.
Indicators are generally what are called leading or lagging indicators. They are different in the way they are used and the information that they provide to investors. Leading indicators are used before the price movement actually takes place and can be useful in forecasting future price movements. It is widely believed that leading indicators are most useful when the market is trading or ranging sideways whereas lagging indicators are regarded as more useful when the stock or the market is trending. While you have to be careful that the indicator is pointing towards the direction of the trend, leading indicators will create trading opportunities in volatile markets without trends. Most of the major leading indicators are what are called oscillators. One popular oscillator is in the Relative Strength Index [RSI] which has values between 0 and 100. An RSI of more than 70 is regarded as evidence that the stock is overvalued.
On the other hand, lagging indicators follow price movements and are therefore less useful for forecasting purposes. Popular lagging indicators are Bollinger bands and moving averages. These indicators are particularly useful in circumstances where there is a strong established trend in a stock. These indicators enabled the investor to profit from more of the trend because they produce fewer trading signals and allow the investor to hold on to positions. In the absence of a strong trend, you may not get enough buy and sell signals to cope with choppy and volatile markets.
Indicators are used to generate trading signals through the use of divergence and of crossovers. A crossover happens when the indicator reaches a particular level or a moving average. It indicates that the trend in the stock is changing and this would lead to a change in the price. For instance, if the RSI moves below 70, you can interpret this to mean that as a result of a fall in price, the stock is changing from an overbought situation. Divergence occurs when the direction of the indicator is the opposite of the direction of the price trend. This can be interpreted to mean that the price trend is weakening and the momentum of the move is changing.
Positive divergence is a bullish signal and refers to the upward direction of the indicator when the price is moving down. It suggests that the trend is about to reverse as a result of which the price is going to move up. Negative divergence is the exact opposite and is generally regarded as a bearish signal.

Comments

Post a Comment

Popular posts from this blog

Forex Trading Requires Some Caution

Forex trading, like all potentially profitable investments, can be risky. Here's how to arm yourself with the knowledge you need to keep from getting burned. Whether it is in the millions or thousands, trading in the Forex is a bit risky. There are a lot of players involved and if you don’t arm yourself properly with knowledge about the Forex you may just get swamped. The Forex is the largest, most vibrant market in the whole wide world. The financial world has never had a market that involves so much transaction. Over a trillion dollars worth of different currencies exchange hands everyday. Some lose in the trade, while some hit the jackpot and make tons of money. The Forex is characterized by its unpredictability and the liquidity because it deals with foreign currencies and each one's value influenced by their own country. That's why anyone who is greatly considering joining the Forex trade should think twice, thrice and maybe even ten times before doing so. This ...
Read more

The Forex Market-What, When and Why?

The Forex Market--What, When and Why? A detailed overview of this amazing financial opportunity... Forex, FX and the Forex market are some common abbreviations for the Foreign Exchange market. Actually it is the largest financial market in the world, where money is sold and bought freely. In its present condition the Forex market was launched in the seventies, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from demand and supply. As far as the freedom from any external control and free competition are concerned, the Forex market is a perfect market. With a daily turnover of over trillions of dollars, the Foreign Exchange market conducts more than three times the aggregate amount volume of the United States Equity and Treasury markets combined. The Forex market is an over-the-counter market where buyers and sellers conduct foreign exchange business using different means of co...
Read more

Forex Supply and Demand

The Reality of Forex Markets - Someone Needs to Say It By now I know that you the reader have scoured the search engines trying to find out how forex is the next millionaire ticket to financial freedom. It’s like clock work that everyone visits this same introduction to forex trading. What a lot do not realize is that the forex image is controlled by a majority of smart marketers. Deception of how the markets really work out are provided in the masses. True there is some truth told but most of the bad is skewed and left out. This is a very difficult thing for a beginner because this information is the foundation of what they learn. Forex markets work the same as any other market in the world. True there is different information that provides the base of the certain market but they all operate in the same manner. So what is the big secret that lies behind how the currency market works? Supply and demand. Yup, a simple economic principle is the over laying factor in price movement...
Read more