Stock indicators are certain calculations used by technical analyzers to determine actual price movements and trends. Stock indicators are typically based on the price and volume of a security and consist of trends, money flow, market volatility and stock momentum. Stock indicators are incorporated by chartists to devise buy and sell signals as well as confirm the quality of chart patterns and price movement.
Types of Technical Analysis Indicators
There are two primary types of technical analysis indicators – leading indicators and lagging indicators.
Leading Stock Indicators
Leading indicators precede price movements and allow analyzers to better predict the direction a trend is heading. These indicators are strongest during periods of non-trending or sideways trading ranges.
Lagging Stock Indicators
Lagging indicators are used during trending periods and always follow price movements, making them a tool used by analysts to confirm a trend’s direction.
Indicators are separated into two different constructions; those that fall within a bounded range and those that do not. The most common type of indicator is bound within a range and they’re called oscillators.
Stock Indicators: Oscillators
Oscillators technical analysis typically carries a range between zero and a given number. When the oscillator indicates a number nearer to zero, the security is considered oversold. Likewise, if the number is nearer to the high-set number, it’s considered overbought.
Non-Bounded Stock Indicators
Indicators that do not fall within the bounded range are also used to form buy and sell signals, although non-bounded indicators vary in the ways they do this.
An example of a non-bounded stock indicator is the accumulation/distribution line which measures money flow in a security. This type of indicator is used to measure the buying to selling ratio by comparing the price movement of a period to the volume of that period. If a security has an accumulation/distribution line that is on an upward trend, it indicates that there is more buying than selling.
How Stock Indicators are Used
Stock indicators are used to formulate buy and sell signals through divergence and crossovers found in technical analysis.
Divergence is when the direction of the price trend and the direction of the indicator trend move in opposite directions. This signals that the price trend is beginning to weaken.
Crossovers indicate when either (a) two different moving averages cross over each other or (b) when the price moves through the moving average. Crossovers are the more commonly used of the two.
Whereas many traders look solely to crossover or divergence indicators for buy and sell signals, they are most effective when used in conjunction with other indicators like chart patterns and price movements.
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