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A technical indicator can reveal average prices, trending volume changes, overall strength of a particular security, volatility levels, and short-term trends. It can also work as part of a larger trading strategy. Here’s a short review of the top technical indicators and how to use them.
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Do you like seeing the big picture of the market at any given moment? Most people do, and it’s no wonder why they feel that way. When you have a general idea of which direction prices are going, it’s often possible to know whether a particular security is riding too high or getting ready for an uptick. That kind of data can be of immense value to amateur and professional investors any time they’re lucky enough to get it.
Where do technical indicators come in? The mathematical formulae that give various perspectives on the current price situation of a stock are invaluable. A technical indicator can reveal average prices, trending volume changes, overall strength of a particular security, volatility levels, and short-term trends. And it can also work as part of a larger trading strategy. Here’s a short review of the top technical indicators and how to use them.
Moving Averages
The simplest of all, the moving average displays a line chart of a specified number of day’s prices, averaged together. Most popular versions are the 50-day and 200-day moving averages, but other timing variations exist. For example, when the 50-day line moves above the 200, that can be a signal that an uptrend is in the making. And, the reverse is true as well. So whenever there are crossovers of these two key lines on the price chart, traders take notice.
RSI
The relative strength index (RSI) is one of the go-to indicators for many investing enthusiasts. This is because it reveals several things at once. For starters, the 0-to-100 RSI value can show overall momentum, with higher numbers signaling rising prices and lower values the opposite. Additionally, this all-purpose tool has the ability to show upcoming periods of volatility. But that’s not all. A value of 30 or below typically is a warning that prices are ready to rally. Values of 70 and above tell traders to look for share pricing to decline.
The beauty of the RSI is that you can create dozens of different trading strategies from it. In order to get a firm grasp on the way to deal with this all-important indicator, check out an online RSI indicator strategy guide. Then start using the techniques in your own investing. Most of the theories surrounding RSI use the scores of 30 and 70, on a 1-to-100 scale, as the tripping points for all sorts of important action. In fact, many of the Sunday morning financial TV programs routinely discuss companies whose share prices are at or near the 30 or 70 mark on RSI charts.
Bollinger Bands
A Bollinger band is a unique, and often artistic technical indicator that shows trading range of a given security. Typically displayed as an overlay on the chart, the Bollinger band appears as a channel around the main line, with narrow and wide ranges at different levels. What is the meaning of those channel widths and how do people use the information?
The most common value of a Bollinger band is to watch where prices break out, above or below the channel. The theory behind the complex mathematics that go into the bands is that a breakout above the channel means there is a pullback coming, namely a decline in dollar-value. A breakout below the channel indicates the opposite, a coming upswing.
EMAs
Exponential moving averages are a clever variation of a standard moving average, as noted above. The key difference between the two is that EMA gives more importance to recent pricing. If you’ve ever watched sports announcers handicap the upcoming week’s baseball or football games, you’ve seen EMAs in action. That’s because most handicapping equations give more weight to a team’s recent performances than games played early in the season. EMAs are indicators that are based on reality. That is, they try to weigh the pricing data and show an average dollar value. This is more apt to reflect where a company’s stock stands at a given moment in time, compared to a simple moving average.
Combination Strategies
Few people use a single technical indicator in isolation. Most find they need more information to make decisions about getting in or out of a particular position. In the vast majority of cases, traders and investing enthusiasts combine or mix-and-match their favorite technical indicators. Basically, they build tailor-made strategies.
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Most often, the moving average, EMA, or RSI is a foundational component of those techniques. After that, it’s possible to add just about any other technical indicator to the mix for a more all-around view of the situation. Most often, the aim is to figure out which direction momentum is headed and whether a given stock is trading above or below its usual price.
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