Technical Analysis. Understanding and A List of Technical Indicators
Technical analysis is the study of price movements and volume patterns to predict future prices. Technical analysts use charts, indicators, and other tools to analyze past market activity in an attempt to identify a pattern or trend that will help them determine whether it's likely for a stock to go up or down over time. The goal is to find out if there are any signs that suggest the current price level may be higher than expected or lower than expected. This information can then be used by traders to make decisions about when to buy or sell shares of a company.
The most common technical analysis indicator used by investors today is called the moving average convergence/divergence, which was developed by Gerald Appelbaum and Myron Scholes at MIT in 1979.
When it comes to trading stocks using technical analysis, you'll want to focus on two main things: finding support levels and resistance levels. Support and resistance levels often act as psychological barriers for buyers and sellers; once these levels have been broken through, they become targets for new buying interest and selling pressure.
Support and Resistance Levels - When looking at charting data, one thing to pay attention to is support and resistance levels. These are points where previous trends come to rest. For example, say we're looking at Apple Inc. Over the last few months, AAPL has traded between $100-$105 per share. If this range were to break below $100, it would mean that the recent upward momentum had run its course. A similar situation could occur above $105, meaning that the downward momentum might take hold. In both cases, the point of breakdown becomes important because it indicates what direction the next move should head in. It also provides clues about how strong the overall trend really is.
Moving Average Convergence/Divergence Indicator - Another popular tool among technical analysts is the MACD indicator. Developed by Hyman Minsky in 1976, the MACD indicator compares the difference between two exponential averages — the "moving" average and the "standing" average.
The following is a list of the most important technical analysis indicators for trading in the stock market. The first column shows which indicator we are talking about, and the second one indicates whether it is an oscillator or not. If you want to know more about each indicator, click on its name.
A List of the Technical Analysis Indicators You Need to Know
1) MACD: Moving Average Convergence/ Divergence
This indicator was developed by Gerald Appelbaum at Trend Research Inc., who also created other popular indicators such as RSI, CCI, ADX.
2) Stochastic Oscillator
Developed by J. Welles Wilder Jr., this indicator measures volatility based on the fast-slow ratio. It uses three lines to measure high, low, and close prices relative to their respective 20-, 50-, and 100-period simple moving averages.
3) Relative Strength Index : RSI
Also known as the rate of change indicator, the RSI looks at the speed with which a security moves against its own prior closing price. Traders use the RSI to gauge investor sentiment toward a particular asset. An RSI reading near 0 means that the security is extremely undervalued compared to its historical performance. Conversely, an RSI reading near 100 suggests that the security is very overpriced.
4) Bollinger Bands
Bollinger bands are used to determine if there's enough room for a security to go up or down before reaching extreme highs or lows. They can be thought of as a kind of virtual band around the current price. This helps traders identify when a security may be due for a breakout.
5) Williams %R
Williams %R is another way to look at volume. Instead of measuring total shares outstanding, it calculates percentage changes from day to day. As a result, it gives us a better idea of whether investors are actively participating in a given security than traditional volume measurements do.
6) ATR Ratio
ATR stands for Average True Range. It represents the distance between today’s highest price and lowest price during any period. The higher the number, the wider the spread between those two values.
7) Money Flow Index: CFTC Definition
Money flow index, also called the money supply index, is defined as the dollar value of all cash held overnight plus U.S. Treasury bills maturing within 30 days divided by the sum of these same items less currency held by banks.
8) Commodity Channel Index: CCI
A trendline drawn through daily closes since January 1, 2003. A break below the blue line would confirm bearish momentum while a crossover above the red line would indicate bullish pressure.
9) Fibonacci Retracement Levels
Fibonacci retracements help define support and resistance levels. These ratios were discovered by Leonardo da Vinci but have become widely adopted only recently – especially among swing traders.
10) Ichimoku Cloud Chart
An ichimoku cloud chart consists of four charts, stacked vertically like slices of bread. Each slice contains a different timeframe; therefore, they offer insight into past, present, and future trends. For example, the topmost slice focuses solely on the short term, whereas the bottommost deals with longer timeframes.
By comparing various timeframe combinations, one gains a fuller perspective of market activity.
11) Stochastic Oscillator
The stochastic oscillator compares actual price movement to predicted range movement. Because ranges tend to widen as markets rise then contract as markets fall, the stochastic provides a signal when expected range expansion has outpaced recent share price strength. When the green line crosses above the orange line, the stochastic indicates overbought conditions exist. In contrast, when the lines cross beneath each other, the stochastic signals oversold conditions.
12) Moving Averages
Moving averages allow you to measure general price movements. There are simple moving averages, such as the 200-day SMA, and more complex ones, such as the 50/200-day SMOA. You could even create your own using indicators!
13) MACD Histogram
MACD, developed by J. Welles Wilder Jr., measures the relationship between two moving averages. Unlike many technical tools, this indicator generates both buy and sell signals because its histogram appears in symmetrical peaks and valleys.
14) RSI / ADX
RSI was first created by J. Welles WellesWilderJr. in 1978. The acronym stands for “Relative Strength Index.” The formula is. This means that if the close is $50, the relative strength index will be 100. If the close is $40, the relative strength index drops down to 80.
1) Elliott Wave Principle
Elliott wave theory was proposed by Ralph Nelson Elliott in 1937. According to this system, shares move up or down based on five waves of equal height. Every three waves represent an upward correction, followed by a downward correction, and so forth. Elliott's theory has been applied successfully across multiple industries via Technical Analysis.
2) Trend Following System
This strategy uses Elliott wave principles to identify long-term trending moves. It helps determine whether prices are rising or falling without having to wait until after confirmation patterns appear. Once it identifies a strong trend, it buys near the low point of every pattern and sells just before the high point. Over time, these gaps fill in and provide reliable entry points for new positions.
3) Elliot Six Rules
These rules help traders follow the basic guidelines of the Elliott wave principle:
1) Trends have a life cycle consisting of six stages.
2) All corrections begin at their Fibonacci retracement level from previous highs or lows.
3) Corrections end once they reach 61% through 63% of the way toward the next major area of support or resistance.
4) Buyers usually emerge right around the centerline during the third stage of a correction.
5) Sellers often occur just prior to the fifth stage of a correction.
6) Stops should only be placed at important pivot points.
There are countless ways to use technical analysis to make money trading stocks. However, there are also plenty of strategies that can lose trades quickly. Before implementing any method into your plan, consider how much risk capital you're willing to commit. Only invest what you feel comfortable losing.