Popular Trading Indicator Used In Stock Market

Trading indicators are the technical analysis tools that traders use to identify the best entry and exit zones on the charts. These tools are used to identify the numerical movement of the share price of a particular company in the market. By using these indicators traders can identify profitable trading opportunities in the market. There are three main types of trading indicators – trend indicators, oscillators and volume indicators. Each type of the trading indicators works differently and can be used to determine different things.

 Trading indicators are most useful when combined with price action.  Price action is your trades, based on your analysis of price and volume.  Indicators help you confirm your trades and place additional trades to help your winning trades be bigger and your losing trades is minimized.

Trading indicators are exactly what they sound like, they are technical indicators which help traders to trade, or perhaps more accurately, they are methods or strategies which are used by traders to help them trade.  Trading indicators do not tell you what to buy or sell, or when to do it, but instead, they are used to help the trader make an informed decision when they are trading.  These indicators can be technical or they can be based on analyzing the currency market, they can be analyzed by the trader to find an entry point and a place to exit from a trade.  There are many trading indicators, and some of them are very popular and are used regularly by traders around the world.

Moving Average

Moving Average is a popular technical analysis tool used to evaluate the average price of a stock over a given period. It is also known as a trend-following indicator. A moving average is an indicator that smooths out price action. It helps in identifying the trend of the price and trading in the direction of the trend. Moving average is used to help investors identify the current trend in a stock in an effort to decide whether the stock is likely to rise or fall in the near future.  A rising moving average generally indicates an upward trend, and a declining moving average generally indicates a downward trend. Three types of moving averages are commonly used by technical analysts: simple (or SMA), exponential (or EMA), and weighted.

If you have a long-term investment strategy, you are probably not interested in short-term movements in the market. Instead of watching the daily swings, you can watch the long-term movements indicated by a moving average. In the range of 20 to 60 days, moving average of 20 days and 50 days is the most used. As you move the number of days further into the past, you will receive less and less useful information, because the price is already adjusted by many factors. If you want to go short term, then you can use 5 days. If you are going long term, look at 20 to 60 days. Moving average is one of the most effective tools in technical analysis. You can use a moving average to generate trading signals.

Popular Trading Indicators-Moving Average

In this chart, 20-period simple moving average is used. Here, price is making a series of higher highs and higher lows indicating an uptrend. Moving average used here is also heading towards upside which is also clearly indicating the uptrend. Traders can use moving average not only for understanding the trend but also as a dynamic support. 

Trading Indicators - Moving Average 2

Here, two moving averages is used which are 9-MA and 20-MA. When 9-MA crosses the 20-MA towards upside, it indicates a buying signal and it is known as a moving average crossover strategy. Many people use this moving average crossover strategy for entering and exiting trades. Which pair of MA will be used for a moving average crossover is depends on the traders. MA 5, 9,13,20,50,200 are mostly used in trading.

Relative Strength Index (RSI)

Relative Strength Index is a popular technical analysis tool used to evaluate the momentum of a stock. It measures the magnitude of recent price changes and compares them to the magnitude of the price changes in a previous period. The RSI oscillator fluctuates between zero and 100. When the RSI is greater than 70 it is overbought, and when it is below 30 it is oversold. The RSI can be used to identify potential reversals in the near future. Also, the RSI reverses very quickly once it goes overbought or oversold. So, the trick with RSI is not to get out too early and miss a move, or wait too long and get stopped out with a loss.

When the value of RSI is in overbought zone, it indicates that a trend reversal or retracement of the running uptrend can be seen. So, traders should avoid buying this share at that moment and should wait for the retracement for a better entry. But it is not obvious that the price will fall as soon as the RSI hits the overbought area. Sometimes RSI stays in overbought area for a long period and price still continues in an uptrend. When the value of RSI is in oversold zone, it indicates that traders should looking for suitable buying opportunities in low prices because there can be a start of an uptrend. It is not recommended to use RSI as a standalone indicator for trading. Traders can find better output when they combine RSI with chart patterns. 

Relative Strength Index-1

Have a look at the marked box, RSI is in the below 30 level which is known as the oversold zone. Also, RSI divergence is also forming as the price is making lower lows and RSI is making higher lows. Traders usually look for oversold zone and divergence for potential buying opportunities.

Stochastic oscillator

Stochastic oscillator is well known technical indicator used to track the location of a security’s price relative to its high-low range over a given time period. It is a type of momentum indicator that measures the velocity and magnitude of directional price movements. Stochastic Oscillator is commonly used to identify entry and exit points for trading positions. It is also useful for determining overbought and oversold conditions. When the Stochastic Oscillator line is above the 70 level, it indicates that the security is overbought and likely to fall. Conversely, when the stochastic line is below the 30 level, the security is considered oversold and likely to rise. The stochastic oscillator is based on the concept that after a period of data where there is a large amount of fluctuation, the volatility will return to normal. Conversely, after a period of low volatility, the volatility will likely increase. In a volatile market condition sometimes, it generates false signals which can lead to bad traders. So this indicator is best used in conjunction with other indicators and chart patterns.

Stochastic oscillator​

Bollinger Band

A Bollinger band is a trading indicator that was developed by John Bollinger. Bollinger bands are a type of volatility indicator and are based on the average price of a security over a set period of time. The purpose of the indicator is to determine oversold and overbought conditions in the market. It uses volatility to determine when an asset is in a state of overbought or oversold. The bands are a moving average of the standard deviation of a security’s price. The middle band is the 20-period simple moving average of the price range and is plotted two standard deviations above and below that moving average. A 20-day moving average is often used as this is the period that the stock market has historically moved in.

The bands get tightened in a low volatility market condition and it indicates that a strong bullish or bearish movement can be seen which can start a new trend. Sometimes false movement is seen before the price starts moving in its actual direction and traders should be aware of the false movements. When bands are largely separated, it indicates that there can be a retracement of the running trend.

Bollinger Bands​

MACD (Moving Average Convergence/Divergence)

MACD means Moving Average Convergence/Divergence. It is a trading tool that uses moving averages to determine trend direction, momentum, and to identify possible trading signals. It is a lagging indicator because it is based on past prices and not current price. The MACD is calculated by subtracting the 26-day (EMA) from the 12-day EMA. This is called the MACD line. 9-day EMA is also used in the MACD indicator which is plotted on top of the previously calculated MACD line. This 9 –day EMA is known as signal line. When MACD line crossed the signal line in an upward, it indicates a buy signal and when MACD line crosses the signal line in a downward direction it indicates a sell signal. Traders use these crossovers techniques to buy shares. MACD indicator can be also used to identify potential trend reversal opportunity with the help of divergence. When price is making lower lows and MACD indicator is making higher lows it is called MACD divergence and it indicates that traders should look for buying opportunities in that stock. One of the limitations of MACD is it produces many divergences but not all of them leads to price reversals. So traders should not enter a trade just after finding a divergence. They should use chart patterns, support resistance and other technical analysis tools to be 100% sure of the trade.

Moving Average Convergence and Divergence (MACD)

In this picture, MACD line crossing above the signal line (showed by green arrow) indicating buying opportunities.  People should be looking for this type of confirmation from the MACD indicator when using it. Traders should take their profit when the MACD line crosses below the signal line in higher timeframe. Whenever you entered in a trade at the beginning of the uptrend, you will see many MACD crossovers to the downside because of the retracement of the trend and you should not close your trade just because of a MACD crossover which is caused by the retracement. Traders should combine multiple signals from other indicators or chart patterns for their exit strategy which will help them to get the maximum output from the market.

Conclusion

Trading indicators are mathematical calculations based on how stock’s price value moves up and down. It helps with the decision of buying and selling. They are not a magic wand, they simply give you a heads up on price movement and let you know the chances of prices increasing or decreasing. Trading indicators are really important. They are often the first step towards building a system. Traders should have a clear understanding of the multiple uses of trading indicators which can help them in their trading.