Technical indicators are heuristic or pattern-based signals produced by
the price, volume, and/or open interest of a security or contract used
by traders who follow technical analysis. By analyzing historical data,
technical analysts use indicators to predict future price movements.
So here are the four different categories of technical indicators:
• Trend Indicators.
• Momentum Indicators.
• Volatility Indicators.
• Volume Indicators.
A technical indicator is a series of data points that are derived by
applying a formula to the price data of a security. Price data includes
any combination of the open, high, low, or close over a period of time.
Some indicators may use only the closing prices, while others
incorporate volume and open interest into their formulas. The price
data is entered into the formula and a data point is produced. For
example, the average of 3 closing prices is one data point [ (41+43+43)
/ 3 = 42.33 ]. Simple math even a 4th grader can do, this is an example
of the moving average indicators used by traders widely.
The variable in this entire system is the timeframe, in which traders choose
to trade in. One trader could take the crossing over the 200 SMA as a
buy signal in a weekly timeframe, by another trader, using daily
timeframes to trade, would miss this crossover entirely. This is, however,
different from the Exponential Moving Average. An exponential moving
average is a type of moving average that places a greater weight
and significance on the most recent data points. The exponential
moving average is also referred to as the exponentially weighted
moving average, giving more importance to things like Volume and
However, one data point does not offer much information and does
not make for a useful indicator. A series of data points over a period of
time is required to create valid reference points to enable analysis. By
creating a time series of data points, a comparison can be made
between present and past levels. For analysis purposes, technical
indicators are usually shown in a graphical form above or below a
security's price chart. Once shown in graphical form, an indicator can
then be compared with the corresponding price chart of the security.
Sometimes indicators are plotted on top of the price plot for a more
Momentum indicators are technical analysis tools used to determine
the strength or weakness of a stock's price. Momentum measures the
rate of the rise or fall of stock prices. Common momentum indicators
include the relative strength index (RSI) and moving average
convergence divergence (MACD).
Now, momentum indicators have been proven to be the more reliable
lot of technical indicators. The RSI (Relative Strength Index) takes
into account Oversold and overbought levels, giving investors a
broader perspective on buy and sell decisions.
An Overall Conclusion
Technical analysis is about probability and likelihoods, not
guarantees. If an indicator works more often than not, even though it
does not work all the time, it can still be effective at generating profits.