So you have learnt technical analysis of stocks,Your next step would be in identifying those indicators which could help you in your analysis, But Wait! You will be overwhelmed by all the indicators you have to base your analysis on. There are more than 3000 indicators listed, You may not be able to use all of them and take decision on time. Here are top 5 Indicators which are used by experts from time to time.
Moving Averages/Exponential Moving Averages
If you are a complete newbie to the markets, this is the simplest of all the indicators to begin with. However it is one of the most preferred indicators by technical experts. It is simply a security’s average closing price over the last specified number of days. The most commonly used moving averages are 20 day, 50 day, 100 day and 200 days. For example, you may compare a 20-day average with a 50-day average. Look at the way the two averages cross over. You can expect a bearish market, if the crossover comes from up to down, and you can predict a bullish market, if the crossover comes from down to up.
Moving Average Convergence Divergence – MACD
Moving average convergence divergence (MACD) is a trend-following momentum indicator, It indicates a relationship between two moving averages of prices. The MACD is different from moving averages in the sense that with exponential moving averages (EMA), much more weight is given on the more recent prices than the rest of the prices plotted on the chart. Traders often watch for a move above or below the zero line. The zero line often acts as a support or resistance for the indicator. The zero line signals the position of short term average to the long term average. As and when MACD rises above zero, the short-term average is above the long-term average, which indicates upward momentum. The opposite is true when the MACD is below zero.
Relative Strength Index-RSI
It is the relative strength Index or RSI, It refers to the relative strength of the security price compared to the past prices of the same security. The period is of 14 days, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.
Bollinger Bands consists of upper and lower bands which are used to know whether is the price is considered to be high or low depending on the price theory. It operates on a fact that an asset value can go up or down depending on two standard deviations. Each of these standard deviations are then plotted on either side of moving average graph of prices based on which price is considered high or low depending on past history.
This indicator is best used a timing tool, and can be used to identify trend changes. It is very helpful to identify oversold and overbought areas. However a word of caution using the stochastic Indicator, during strong uptrends and downtrends, it will continuously remain in overbought and oversold areas giving rise to false signals. To avoid these kind of scenarios, it must be best used with RSI Indicator
I am trainer and research analyst at CapitalVeda Financial Research, Apart from writing research reports on technical and fundamental analysis of stocks, I am very passionate to teach and impart knowledge on capital markets to deserving candidates willing to learn and make profits. I am also a farming enthusiast and love to work on real life farming challenges. Enjoy travelling a lot. Trading, Investing and Travelling makes a great career combination. Isn’t it!