INDICATORS

indicatorStatistics used to measure current conditions as well as to forecast financial or economic trends. Indicators are used extensively in technical analysis to predict changes in stock trends or price patterns. In fundamental analysis, economic indicators that quantify current economic and industry conditions are used to provide insight into the future profitability potential of public companies.

Technical Indicators are result of Mathematical calculations based on the price and/or volume The values obtained are used to forecast probable price changes of a security that measure such things as money flow, trends, volatility and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals.

Why use Indicator ?

Indicators serve three broad functions: to alert, to confirm and to predict.

  • An indicator can act as an alert to study price action a little more closely. If momentum is waning, it may be a signal to watch for a break of support. Or, if there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout.
  • Indicators can be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Or, if a stock breaks support, a corresponding low in the On-Balance-Volume (OBV) could serve to confirm the weakness.

Some investors and traders use indicators to predict the direction of future prices.

Remember

Indicators indicate. This may sound straightforward, but sometimes traders ignore the price action of a security and focus solely on an indicator. Indicators filter price action with formulas. As such, they are derivatives and not direct reflections of the price action. This should be taken into consideration when applying analysis. Any analysis of an indicator should be taken with the price action in mind. What is the indicator saying about the price action of a security? Is the price action getting stronger? Weaker?

Even though it may be obvious when indicators generate buy and sell signals, the signals should be taken in context with other technical analysis tools. An indicator may flash a buy signal, but if the chart pattern shows a descending triangle with a series of declining peaks, it may be a false signal.

Concepts

  • Average true range – averaged daily trading range, adjusted for price gaps
  • Breakout – the concept whereby prices forcefully penetrate an area of prior support or resistance, usually, but not always, accompanied by an increase in volume.
  • Chart pattern – distinctive pattern created by the movement of security prices on a chart
  • Cycles – time targets for potential change in price action (price only moves up, down, or sideways)
  • Dead cat bounce – the phenomenon whereby a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement
  • Elliott wave principle and the golden ratio to calculate successive price movements and retracements.
  • Fibonacci ratios – used as a guide to determine support and resistance
  • Momentum – the rate of price change
  • Point and figure analysis – A priced-based analytical approach employing numerical filters which may incorporate time references, though ignores time entirely in its construction
  • Resistance – a price level that may prompt a net increase of selling activity
  • Support – a price level that may prompt a net increase of buying activity
  • Trending – the phenomenon by which price movement tends to persist in one direction for an extended period of time