What are Indicators?
Market indicators or indicators are tools that follow the quantitive nature of data derived from forex, stocks, and other financial assets. This information collected by these indicators is presented in the form of charts, graphs, and tables. Market indicators and trends aim to help traders in making speculations regarding future market movements.
Many traders rely on bar chart signals for technical analysis. This is not always reliable as bar charts cannot successfully filter trends from the noise surrounding them. Trend indicators are built to provide objective measures to the traders that allow them to speculate trends and their directions successfully. It is easy to follow a trend using these indicators as it is represented with a single line’s help. Price data is smoothed, and you can easily concentrate on the trend line.
Trending and Ranging Markets
Most indicators are better suited for trending markets than ranging markets, except for the complex ones like the Directional Movement System. They lose money when they are used in a ranging markets. This happens because of the fluctuations taking place in a narrow price band. This can whipsaw traders in or out before they are even ready. Therefore, it is better to use momentum indicators in this type of market.
There are dedicated indicators for both types of markets. You need to confirm the market type before employing an indicator.
Different Types of Trend Indicators
Trend Indicators can be classified as oscillators, indicators based on moving average, band indicators, directional movement, stop and reverse systems, price averages, and combinations of these approaches.
- MACD: MACD or the Moving Average Convergence/Divergence is a technical indicator that helps check the changes in the direction, duration, strength, and momentum of a trend.
- MACD Histogram: This one is an upgrade of the original MACD. The MACD is not equipped to trace price movements, but the MACD Histogram can take care of this problem.
- TRIX Indicator: This is an oscillator that will help you in capitalizing the trends that are short or as long as the window period.
- Smoothed RoC: Fred G Schutzman introduced this oscillator in 1991. It is similar to the Rate of Change and Momentum indicator but competent enough to avoid their weaknesses.
- Relative Strenght index, RSI
2. Moving Average indicators based on Closing Price
- Moving Averages (MA): It is one of the simplest tools used for technical analysis. It constantly updates the average price by smoothing the price data. The trader can set the time period, which can be for days or even weeks.
- 2 Moving Averages: It is a fast-moving average that represents the price line. The difference between this indicator and the MA is that it is used for a short period of time, usually 5 days, while the MA is used for a prolonged period.
- 3 Moving Averages: This indicator helps traders in identifying ranging markets. Traders can stop their trade and direct their resources towards trending markets.
3. Band indicators
- Price Envelope: These are also known as percentage bands. These are used to define oversold or overbought levels. They can be used on their own as well.
- Bollinger Bands: These bands are also used to indicate oversold and overbought levels but by the moving averages.
4. Directional Movement
- The Directional Movement System: This is a complex indicator used in both trending and ranging markets. It identifies the current market first before giving trading signals.
5. Stop and Reverse System
- Parabolic SAR: This indicator follows the trending market and highlights profitable entry and exit points for the traders.
6. Closing Price and Moving Averages
- Detrended Price Oscillator: This oscillator is used in short-term cycles. It compares the current closing price to the previous MAs.
- Commodity Channel Index: This index measures the price position of the MAs. You can check when the market is overbought or oversold.
7. Price Averages
- Typical Price: It is the average of the prices during a trading period.
- Median Price: As the name suggests, the median price is the midpoint of each period’s trading range.
- Weighted Close: It is very similar to the typical price. The main difference is that it lays more stress on the closing price.
8. Price Comparison
- Price Ratio: It is similar to Price Comparison (explained below) as it also compares prices of different stocks and indexes. Some traders use it as a general filter to check which stock has outperformed the other.
- Price Comparison: This is a straightforward tool that allows traders to compare different stocks and securities prices.
- Price Differential: This tool also compares interest rates or bonds instead of comparing stock prices.