Technical Analysis. A Guide to Key Indicators

Technical Analysis. A Guide to Key Indicators

In the financial market, prices don’t just move up and down for no reason. Whenever you see a candle go up or down, there is an intrinsic reason why this happens. For instance, the price of Brent won’t move from $30 to $35 a barrel for apparently no reason. It will make that move because of a number of reasons which are broadly categorized into two: technical factors and fundamental factors. Fundamental factors are simply issues to do with oil supply and demand. For instance, if OPEC and other oil producers decide to cut their oil supply, the oil price will move up. Remember in economics 101, if the supply of a commodity goes up with demand constant, then the price will go down because the customers have a wide variety of places to choose from. Technical factors are majorly a result of market participant’s psychology. For instance, if the price of oil reaches $35 a barrel from #30, many traders who had placed a buy order will likely exit the trade. This is because they believe that there is no way the price will continue moving up. There are various technical indicators that help a person determine how other traders are placing their trades. In this article, I will explain a number of the most common technical indicators.

Relative Strength Index (RSI)

RSI is one of the most commonly used technical indicators. RSI is in a category known as oscillators which aim to provide information on oversold and overbought positions. The chart below shows the RSI placed in a Brent crude chart.

techn_analysis1

Moving averages

Moving Averages (MA) are also some of the most widely used technical indicators today. This is because of their accuracy and their use of use. There are a number of types of moving averages. These can also be used in a number of ways. Some of the types of moving averages are: exponential moving averages, simple moving averages, and weighted moving averages. Personally, I use the double exponential moving averages as shown below.

techn_analysis2

In this chart, you can see the red and white lines. The red line is the 14 day exponential moving average while the white line is the 7 day exponential moving average. By overlaying these two moving averages, you are able to make a better prediction.

Stochastic

Last but not least, stochastic is another key indicator that you can use to make trading decisions. It is an oscillator which you can use in two ways: slow and fast. Fast stochastic is made up of two lines %K and %D which are plotted on the same chart. This is usually very sensitive to the market turns. It also leads to many whipsaws. I advise you not to use this strategy. Rather, I suggest you use the slow stochastic where the %D of the fast stochastic becomes the %K of the slow stochastic. It is then smoothed by repeating step 2. I therefore recommend that you use a 5-bar slow stochastic which is smoothed over a 3-day period. Stochastic is designed to fluctuate between 0 and 100 with key reference lines drown at 20 and 80% levels to mark overbought and oversold positions.