The majority of traders have a positive attitude towards the implementation of technical analysis. The tools help not only understand what is happening in the market, but can also aid in prediction of future changes. First, let us define what is a technical indicator. It is a class of indicators that is assisted by past data and price changes. (TIs) technical indicators are used to foresee upcoming asset prices or their fluctuations (trends) based on historical data. An important aspect of technical indicators is that they do not take into consideration fundamental factors. TIs are mainly used by active traders, as these are mainly directed at short-term price changes analysis and come in handy while determining entry and exit points for assets. TIs can be divided into two main categories:
- Trending. Such indicators are implemented when there are obvious upward or downward trends.
- Oscillators. These indicators can be used during periods of flat. Moreover, oscillators should be used with caution when there is a clear uptrend or downtrend.
Perhaps the most used and uncomplicated indicator is the Moving Average or MA. It is the subsequent range of average price rates with a particular effacement period. MA are central to more elaborated technical indicators. MAs can be weighted, simple and exponential. The simple MAs is the average of all data elements in the series separated by the number of points. The distinctiveness of exponential and weighted averages is that more weight is given to new observations. It makes exponential and weighted averages more susceptible to the current trends and makes it applicable for trend direction determination. In technical analysis MAs are mainly used for identification of the trend direction and time of opening and closing a trade. Most likely, you are aware that trends can be short-term, medium-term and long-term, this suggests that MA effacement period will depend on the goals of the trader. Almost every chart will have a moving average and its goal is to eliminate short-term fluctuations in the market. It makes it possible to identify the overall trend of the market easily.
Bollinger bands are other widely used indicators. The main function of BBs is to determine irregular price peaks that appear on the existing trend. The latter is defined by moving averages. In diagram form it is expressed in three lines that are moving averages. The operative factor implemented in the indicator for the standard deviation is advised to be chosen in the spectre from 1 to 3. In case you still decide to go with less than 1 and more than 3, the indicator will yield too many or too few signals. When you use BBs please take into account:
- If there is a stable trend, points for opening or closing can be successfully defined.
- It is not an obvious signal to sell if you see an upward trend. The same goes for the downward trend and a buy signal.
Average Directional Index or ADX is a tool that points out the strength of the trend. It determines if the trend will continue or weaken. The ADX values usually vary from 0 to 50. If the value of the indicator is high it means that the trend is strong and vice versa. This indicator does not provide the signals to buy or sell, but only shows the strength of the trend. ADX can be used in combination with Bollinger bands. If an indicator appears in the range between 30 to 50, it means that the trend is strong. However, if Average Directional Index values are above 50, it means that carrying out transactions is not recommended and a radical change should be observed soon. ADX is used to detect the potential changes in the market. If the trend gradually approaches the 20 mark, that implies the incremental strengthening of the trend. If the trend starts falling from the position of 40, it means that trend will lose its strength.
There are a variety of indicators offered on almost any platform; all you need to do is to understand which ones suit your trading style. We recommend to use indicators selectively, and the three mentioned in this article should improve your trading performance noticeably.