4 Types of Indicators

Technical analysis is a method of predicting a security's future price based on historical trends and chart patterns. Remember, true technical analysis removes factors which fundamental analysis relies on. The only thing that matters is the chart and how individual traders interpret it.

The tools technical analysts have at their disposal are called “technical indicators” or simply “indicators".

Every technical indicator, no matter how fancy it might look, is visually expressing one of or a combination of four things:

Each one of these factors into a good set up and a good trade. Utilizing a combination of these four types of indicators will greatly increase your probability and your profitability.

With that being said, it is important to note the only two things that actually matter:

PRICE and VOLUME.

It really comes down to those two things. Everything else is extra.

Volume
The volume is simply an indication of trades per unit time. The greater the number of trades being placed over a period of time the greater the volume.

Volume is a method of gauging the strength of a trend and the direction a security’s price will move. Additionally, as the volume increases so does the liquidity of the underlying security.

Volume, like volatility, create opportunities for the prepared trader and the intelligent investor.

Popular VOLUME indicators:

MAVOL (moving average), CYC (cost average), Market Volume.

THE TREND IS YOUR FRIEND. It’s easier to swim with the currant than against it, and trading is no different.

Most methods of predicting or measuring trends are moving averages. The idea behind this method is beautifully simple. The price represented by candlesticks is incredibly sporadic and can cover wide ranges. Looking at the candles individually creates too much noise, and so an average is generated.

This moving average helps traders verify the direction of the current trend and can also aid in spotting reversals before they happen.

Common Trend indicators:

SMA (simple moving average), EMA (exponential moving average), MACD

Volatility is the statistical measure of the standard deviation of returns over a given time. It is a measure of the magnitude of price fluctuations for a given security.

Short term traders NEED volatility to profit. You can have the best position in the world, but if the price fluctuation isn't also in your favor you’ll end up horizontal.

Common Volatility indicators:

Bollinger Bands (BB), ((Float and beta) Not “indicators” but useful volatility gauges)

Momentum indicators are used to measure both the strength and speed of a price movement with respect to time. Momentum indicators are generally built on a 0 to 100 scale so that given changes in momentum can be easily registered.

Indicators of this type don’t give us much information concerning future price movements, but we can get an idea of how overbought or oversold a security is. Due to this lack of information, it is important to couple momentum indicators with another signal.

Common Momentum indicators:

Relative Strength Index (RSI), Stochastics

There are a few guidelines you should follow when choosing indicators:

- Use at least TWO indicators. Each from a different group. If your signals line up across groups your probability increases.

- Use a lagging and a leading indicator. Lagging indicators generate signals after events while the leading indicators generate signals before.

- KEEP NOTES. If you don’t compare results with a given indicator you’re just shooting in the dark.

Let’s be better prepared Monday than we are now.

Hustle and Motivate.

© Stock Scalpers. 2021