Main indicators used in technical analysis

Types of technical indicators

Technical indicators are divided into the following groups.

• Momentum indicators: they help to understand how quickly the asset price is changing. They don’t identify the movement direction but only the timeframe within which the price change occurs. Thus, they shall be combined with other indicators.
• Trend indicators: these indicators help traders to understand whether the trend is going to continue or reverse. 
• Volume indicators: these indicators show how many assets are bought and sold during a specific period. 
• Volatility indicators: these indicators help traders to assess the volatility level in the market and make their decisions accordingly.
• Breadth indicators: these indicators show the number of market players and their categories.

Momentum indicators

These indicators help to understand the speed of price changes and the strength of the asset price movement. 

The main momentum indicators are the following.

Moving Average Convergence Divergence (MACD)

This momentum indicator shows the relationships between two moving averages. The indicator consists of two lines - the MACD line and the signal line. When the MACD line crosses the signal line from below, it forms the buying signal. When the MACD line crosses the signal line from above, it forms the selling signal.

Relative Strength Index (RSI)

This indicator shows how fast and to what extent the price is changing. This indicator oscillates between 0 and 100, with the centerline located at 50.

When the RSI crosses the center line and moves up, it signals an uptrend. When the RSI moves above 70, it shows that the market is overbought, and a trend reversal is expected.

If the RSI crosses the center line and moves down, it signals a downtrend. When the RSI moves below 30, it means that the market is oversold, and thus, a trend reversal is expected.

Trend indicators

Trend indicators signal that a current trend is going to continue or it is going to reverse. Moving averages are the most popular trend indicator. 

Moving Averages

This indicator smooths the asset price movements by making it average. It reduces variations caused by random price fluctuations. The moving average can be of any period that a trader chooses: 10 days, 20 days, etc. This indicator helps to determine whether the trend in the market is going to continue or a reversal is expected.

Volume indicators

This indicator type is often ignored by novice traders, but it is an important parameter that helps to confirm trends and patterns. It shows the sales and purchase volumes of an asset in the market, and thus, it gives traders early signals when the asset price is going to reverse, or the trend persists.

On-Balance indicator

On-Balance Volume (OBV) is a volume indicator that allows traders to assess the selling and buying pressure.

We calculate it by summing up the volume of up days (when the asset’s price goes higher than the previous close price) and subtracting the volume of down days (when the asset’s price goes lower than the previous close price). 

• When the asset price and OBV make higher peaks, the uptrend is more likely to continue.
• When the asset price and OBV make lower peaks, the downtrend is more likely to continue.
• When the asset price makes higher peaks and OBV makes lower peaks, the upward trend is likely to reverse (this situation is known as negative divergence).
• When the asset price makes lower peaks and OBV makes higher peaks, the downward trend is likely to reverse (this situation is known as positive divergence).

Volume Price Trend indicator

This indicator helps to determine the price direction of an asset and the strength of the price change. 

This indicator consists of a cumulative volume line which is built based on the price and volume changes of an asset.

• An increase in volume and price means that the trend is going to be upward.
• A decrease in volume and price means that the trend is going to be downward.
• The increase in price and decrease in volume means that the downward trend may reverse. It is called a negative divergence.
• The decrease in price and increase in volume means that the upward trend may reverse. It is called a positive divergence.

Volatility indicators

To get profit, traders shall not only pay attention to the market trend or prices but also to the volatility levels. The periods of volatility can create swings and make it difficult for traders to trade. Normally, the market is highly volatile when it is trending, and the volatility levels drop during a consolidation phase.

The most common volatility indicators are the following.

Bollinger Bands

This indicator is formed by three bands - the upper, the lower, and the middle. The middle band is a simple moving average, and the lower and the upper bands show standard deviations (positive and negative) from a simple moving average. 

When the volatility grows, the bands expand. And when the volatility decreases, the bands contract.

Breadth indicators

The market breadth shows the market participants. It can be obtained in many ways. For example, the number of stocks in the market can be determined by using this indicator. 

It shows during a market rally whether the rally is sustainable. If an uptrend is accompanied by the market breadth, it is sustainable and will stay. But if there is a rally but the breadth is diminishing, it means that the rally may not sustain for a long time.

Number of stocks above the Moving Average

This indicator helps to determine whether the underlying index is weak or strong. If the indicator is above 50%, it is a sign of a bullish market. If the indicator is below 50%, a bearish trend may come.

Bottom Line

Traders use a lot of technical indicators to trade profitably. Various technical indicators also shall be combined to obtain more accurate data and signals. Thanks to their quantitative character, technical indicators are also used for automated trading.