Technical indicators are the foundations of day trading. Without them, it is impossible to make profitable trades. They are used by all professional traders including those who work in large Wall Street banks. To new traders however, the indicators appear as complex tools that might seem confusing.
In this article, We will look at some of the best indicators you can use in your trading. However, it is important to note that you are free to use other indicators that suit your trading style.
Further, you should not fall into the trap of overusing the technical indicators: in fact, the fewer you use, the better it will be for you.
→ Technical Analysis. A Guide to Key Indicators
These are the most common indicators. There are three common types of MAs:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
- Smoothed Moving Average
The SMA is calculated by adding the prices of the securities and then dividing by the number of periods. The EMA is calculated by calculating the SMA and then using a multiplier to add more weight into it.
The best way for using the moving averages is to use two MAs in one. This is common in what is known as the moving average crossovers.
→ Moving Averages for Technical Analysis
A buy signal emerges when the pair touches the lower band while a sell signal emerges when the price touches the upper band.
The goal of most traders is to enter a trade and ride the momentum. In this, when the price of a security is moving up, the trader opens a buy trade and when the price is falling, they short it.
The momentum indicator can help you know when the strength of the trend is continuing. When the trend is rising, the momentum indicator will move upwards and when the downward momentum is continuing, the momentum indicator will move downwards.
→ How to use Momentum
The MACD stands for Moving Average Convergence Divergence. It is another important and common indicator that is used to identify buy and sell signals. The buy signal is generated when the signal line crosses the MACD line going upwards. A sell signal is generated when the two lines cross one another heading downwards as shown below.
Relative Strength Index (RSI)
The RSI is an oscillator indicator that is used to identify overbought and oversold signals. When a security is overbought, it is usually a signal to sell and when it is oversold, it is a signal to buy.
Volume indicators are very important when you want to confirm the direction of a trend. For example, when you are waiting for a breakout to happen, the volume indicator will help you confirm the breakout. When there is a breakout with low volume, this is often an indicator of a false breakout.
Other than these indicators, other technical tools like the Fibonacci Retracement can help you identify the key entry and exit levels.