Technical Analysis Indicators and Patterns
When looking at a stock trading chart, the new stock trader can be forgiven for being confused. The technical stock trader on the other hand uses various technical analysis indicators and patterns to understand trading charts. It takes time for a new trader to understand these indicators but over time, it becomes simpler.
There are hundreds of technical indicators and new ones being created every day. Some of these are free and others are paid for. Since it is impossible for the technical analyst to know all indicators that have been created, one is advised to pick a few and use them for technical analysis. Some of the popular indicators that are used are described below.
1. Moving Averages
A moving average is a technical indicator that shows the average value of a security’s price over a period of time. It is normally drawn as a line on a chart and as the price of the company goes up or down, the average price will change.
There are seven popular moving averages: simple, exponential, time series, triangular, variable, volume adjusted and weighted moving averages. The difference between these moving averages is the weight assigned to the most recent data.
2. Relative Strength Index
One of the most popular indicators for all technical traders is the relative strength index or the RSI. It is an oscillator that measures the internal strength of a particular company. It compares the number of days a stock has finished up with the number of days it finishes down.
It ranges between 0 and 100 and over a certain time span usually 14 days. Interpreting it depends on the trader. The most common interpretation is that if the value of the RSI is above 70, then the stock is overbought and is likely to fall in price and if the value is below 30, it is oversold and the price is likely to rise.
3. Bollinger Bands
Bollinger bands are three lines that are plotted on the price that normally measure market volatility. The idea is that prices will tend to stay between the three lines. If the market is very volatile, Bollinger bands will widen and during periods of price consolidation, Bollinger bands will tend to converge.
The best traders use Bollinger bands along with other indicators to get good trading opportunities.
The volume indicator is very important in technical analysis. Volume is simply the number of shares or contracts that are traded at a specific period. The period can be an hour, a day or any other period. Volume provides a clue as to the intensity of a price movement.
Low volume can indicate that traders are indecisive and there is no set trend. High volume is the opposite and during a good trend, the volume traded will be gradually increasing as more traders concur that the price should go higher.
A good technical analyst will learn the best indicators that he can trade with in order to make a profit. Once one has identified the best indicators, he can use these to identify the stocks that he can trade at a particular time.