Technical indicators are indispensable tools in every Forex trader’s arsenal. Markets can change and conditions can shift with at any moment when it comes to trading, so the ability to quickly spot developing trends and interpret their ramifications for you and your investments can be the difference between a healthy payday or a bad day on the market. Technical indicators allow you to see the market reality for what it is in good time and adjust accordingly.
Technical Indicators Defined
Basically put, technical indicators refer to series of data points that traders derive by applying certain formulas to the price data of a holding (stock, security, etc.). When we speak of price data here we mean any grouping of the high, low, opening, or closing price of a holding over a certain period of time. The way these data sets are used and which ones, in particular, are considered varies depending on what indicator you’re seeking.
The reason numerous data figures over time are used is due to the fact that values rise and fall over time, and picking one particular spot to base your analysis on might mislead you or fail to give you any actionable results at all. By taking the data spread out over time (the longer the more reliable), we smooth out our data line, giving us a truer representation of the general trend the data is taking.
Once suitable data points are identified over time, you can chart your indicators. This will usually be done in a graphical form either above or below the particular holding’s price chart, making a comparison between the indicator and the corresponding chart convenient. Some might even plot the indicator directly over the chart to make things even more easily discernible.
Technical indicators might vary in their complexity and ease of analysis, but they all can play an important role in helping a trader better understand the underlying strength and future direction of stock values and observable price actions.
You can group the usefulness of technical indicators into three main basic functions:
#1 To Alert. There are indicators that provide traders with effective ways to keep an eye on the movements of their holdings so as to quickly recognize occasions for concern or opportunities for a benefit. Should your stock’s momentum be on the decline, then it might be a good time to pull out of the holding in anticipation of a fall in value. On the other hand, should your indicators reveal a large positive divergence building up, it might signal a good opportunity to buy into the stock in anticipation of a value appreciation.
#2 To Confirm. Indicators are a branch of the larger discipline of technical analysis, but they can serve a useful function in helping verify and confirm the conclusions and predictions of other technical analysis methods employed by traders.
#3 To Predict. Indicators can be put to effective use by trader s in the prediction of a stock’s future behaviour. A moving average, for example, when looked at with the use of Bollinger bands can be an effective determiner of a stock’s future motion. Should a stock be below the bottom line of the Bollinger band, it might be safe to predict a future rise in the stock’s value and if it should be above the Band’s upper line, then a decrease might reasonably be expected.
There are numerously varied indicators traders use for various purposes, but a particularly useful class of indicators, especially for day traders who need to make rapid decisions and adjustments to their portfolios, are known as oscillators.
These are indicators that fluctuate above and below the centre line of a stock’s value (centred oscillators) or between predetermined levels (banded oscillators) as the value changes with time. In a broad sense, the reason these types of indicators are so important is the particular function they make possible. Using a centred oscillator, a trader can determine the direction of a stock’s value momentum while with a banded oscillator, it becomes possible to identify when a stock has been oversold or overbought. Both these functions are indispensable to a trader looking to make a good return on their investment.