Confused by the colored lines on your trader stock charts? What added value can these wild lines add to your chart analysis? That is precisely what we want to find out in this article.
In technical analysis, these colored lines are technical indicators used to predict the market. Trading indicators are plentiful, with creative traders devising myriad new variations daily. But it is not at all necessary to master all these indicators. However, here are ten technical indicators you should know about.
Technical indicators offer a wide range of possible applications for analyzing market movements and forecasting future price trends. In particular, advanced technical indicators are primarily based on complicated formulas, which you do not need to know.
The role of technical indicators
Technical indicators are often used in chart analysis of stocks, indices, and other securities. There are various types of indicators, most of which relate to price or sales and are formed by calculating price and sales ratios.
Important chart indicators are trend indicators such as the MACD (Moving Average, Convergence/Divergence), oscillators such as the Relative Strength Index (RSI), and course/price channels such as Bollinger Bands.
Technical indicators are used in stock analysis to be able to forecast better future price developments based on probabilities.
Trend indicators like the MACD can be used to show the direction of price movement. Oscillators or momentum indicators are suitable for determining trend strength. The RSI can be used, for example, to assess whether a stock is overbought or oversold and indicates a change in trend.
On the other hand, Bollinger Bands provide information about volatility and are often used to make buying and selling decisions.
Moving averages technical indicators
The moving average is one of the simplest technical indicators derived from prices. There are only two available basic variants, although there are many versions.
The Simple Moving Average (SMA) has historically been popular as a technical indicator because it is easy to calculate without using a computer. Despite the power of powerful charting software, it remains popular and continues to attract traders simply for its simplicity.
The SMA is calculated by adding the average closing prices over a given time period of X price bars or candlesticks. These values are then divided by the corresponding X time period. That’s easy, isn’t it?
The interpretation of the simple moving average
The basic approach of this trend-following indicator is to compare prices against the SMA to capture the market sentiment.
- Prices above the moving average → bullish
- Prices below the moving average → bearish
You can also look at the slope of the SMA:
- The moving average line is sloping up → bullish
- The moving average line is sloping down → bearish
By placing the moving average on the price chart, you can use it as a support and resistance level.
The Exponential Moving Average (EMA)
Previously, there was only the Simple Moving Average (SMA) as a technical indicator. But over time, traders were no longer satisfied with this simple indicator, as they often are with simple methods in the long run. So they started experimenting with the SMA. As a result of these thought processes, you then called the original average “simple” to distinguish it from the new complex methods.
Basically, the interpretation of the EMA is the same as that of the SMA. It’s about capturing the interplay between SMA and EMA. Because the exponential average is more responsive to more recent prices, it generates more trading signals from bullish to bearish market action or vice versa.
However, the more signals the moving average produces, the less reliable each signal is. This is an inevitable conflict that occurs with all technical indicators.
Our explanations of the most popular technical indicators help you interpret them correctly and suggest how to combine different indicators to evaluate securities better. Because experienced traders never rely on a single technical indicator but use a combination of complementary indicators to confirm recognized signals in this way.