Updated: Feb 21
Technical Indicators are helpful for beginners in the stock market as they bring some discipline by avoiding unnecessary trades. They also help Algo Traders to design a mechanical system to manage their work.
All technical indicators can be broadly classified into two categories: Leading Indicators and Lagging Indicators.
Leading indicators are those who lead the price movement. They give a signal before a new trend or reversal occurs.
Lagging indicators are those who follow the price action. They give a signal after the trend or reversal has started.
Technically all the technical indicators can be divided into four types, as shown below:
Volatility Indicators, and
The traders who use the “Trend following” technique use any Trend indicators to support their trading decisions.
Moving Averages (MA), MACD, Average Directional Index (ADX), Parabolic SAR (PSAR), Linear Regression are some of the examples of Trend Indicators.
These indicators are designed to show the direction and strength of any script. The direction of the trend can be upwards, downwards, or sideways.
These indicators belong to the Lagging Indicator concept.
These indicators are used to measure the speed of a script in a given period.
Short-term traders focus on scrips moving significantly in one direction with adequate volume to make quick money. For this reason, they use momentum indicators like RSI, Stochastics, CCI, Williams %R, etc.
Below are the two widely used essential characteristics of the Momentum Oscillators:
Overbought and Oversold conditions
Bullish and Bearish Divergences
Overbought/oversold conditions are used to predict the end of the trend. Then traders plan to take the trades in the opposite direction of the existing trend.
For example, if a momentum indicator shows an overbought condition for a script, traders will look to sell the stock.
Similarly, divergences are used to pick the end of the trend by identifying its weakness and taking the trades in the opposite direction.
The volatility is the relative rate at which the price of stock moves (up and down).
A high volatility condition is suitable for short-term traders. Hence, many volatility indicators such as Bollinger Band (BB), Average True Range (ATR), Donchin channel, and Volatility Chaikin are used by many traders.
The ‘Volume’ plays a crucial role in trading after ‘Price’ and ‘Time’ parameters.
A trend with high volume indicates the probability of the price moving in the trend direction is high. Hence this can be used to get the confirmation of a trend or reversal of a trend.
A few examples are Volume Profile, Money Flow index, Chaikin money flow, Force Index, and On balance volume, etc.
Let us explore the top 10 technical indicators in the stock market.
Top-10 Indicators in Trading
Below are the widely used top-10 indicators in stock market trading: