Stock market trading requires good market knowledge and skills. Traders cannot simply jump in and hope to earn. The financial market is highly volatile, which makes the prices of shares fluctuate.
In such trading, traders use technical indicators. These tools support traders in predicting market changes and making their decisions. Thus, supporting efficient trades.
Below, we have explored the seven popular technical indicators in stock trading. Traders can use them and make high profits.
Stock Trading Technical Indicators
Technical indicators are the tools that make mathematical predictions using historic price, volume, and open interest details. There are many technical indicators available in the market. Traders can choose the suitable one and make efficient trades.
Here are the 7 popular technical indicators in stock trading:
Moving Average Convergence/Divergence
Moving average convergence/divergence (MACD) is one of the top technical indicators in stock trading. Many traders rely on the indicator to analyze market momentum.
The indicator guides traders with signals of the stock momentum. It compares short term and long term momentum of the stocks. It is done in order to estimate the future direction of the stock price.
Thus, comparing two moving averages for a time period. It typically uses a 12 day to 26 day moving average of stocks.
It is a stock indicator which is commonly used in technical analysis. So, stock traders can smooth out price data by having constantly updated average prices. The rising moving average indicates stock is in uptrend but the declining moving average is a sign of a downward trend.
Traders can analyse these signals and accordingly make their stock trades.
The Accumulation/Distribution Line
The accumulation/distribution line is a technical indicator that is used to determine whether the money is flowing in or out of the stock traded. When the A/D line slopes upwards traders assume new money is coming up.
While if the slope is downwards it says the opposite. The indicator is mostly close to the movement of stock. However, traders can use their understanding also as it may tend to move a bit faster than the underlying stock.
The index or line in the stock market helps traders to have a technical analysis. It indicates the price and volume which supposedly acts as the leading indicator of the stock’s price fluctuations.
Bollinger Bands
Bollinger bands are a popular technical indicator. Stock traders use them to identify the volatility of the market. The indicator has a simple moving average, and two lines plotted on the charts.
The lines are plotted on two standard deviations on either side of the central moving average line. The outer line makes up the bands.
When the band is narrow the market is quiet. While when the band is wide the market is loud.
The technical indicator is a momentum indicator which is used for technical analysis. It depicts two standard deviations above and below the simple moving average.
Traders of the stock market can use it to identify sharp, short-term price movements. Also, they can understand the potential entry and exits of the market.
There are three lines in Bollinger Bands, the upper, middle and lower band. Middle band is the moving average which parameters are chosen by the trader. While the upper and lower bands are on either side of the moving average band.
Exponential Moving Average
An exponential moving average is the type of moving average. It places greater weightage on the recent data of the stocks. It is also called the weighted moving average.
It reacts to the price changes of stocks in comparison to simple moving averages that only take historical data, thus giving equal weight to all the observations.
Formula for Exponential Moving Average is:
(Value today * {smoothing/1+days} + EMA yesterdays * [ 1- { smoothing/ 1+days})
Traders have many possible choices for smoothing factors,but the most common choice is 2.
As it measures the trend direction over the time. Stock traders can use it to analyse market changes and trade in the shares that would help them make profit. Besides, using EMA would give the latest market data making it easier to trade.
Head and Shoulders Pattern
Head and shoulders is a chart pattern. The pattern appears when the stock price rises to peak. This forms the first shoulder of the pattern and then falls. Then the next formation rises above the previous peak to form a head.
Then it falls below the first shoulder before rising again to level the first shoulder and falling. Thus, it creates the second shoulder.
Double Tops and Bottoms
Double tops and bottoms are another important chart pattern. It is used by stock traders to analyse the price movements of the stock. It forecasts the changing trends of the market, and it is easy to spot it.
The double top has been in stock on two occasions, testing the specific price level. In both cases, it hits the resistance level. On the other hand, double bottoms occur when the stock falls at a certain price level. It finds support on both occasions.
Gaps
Gaps is the pattern that takes place when stock opens higher or lower than the previous day’s closing price of the share. The difference occurs due to various reasons: it can be news, market fluctuations or anything that impacts the price before the market opens.
This moves the stock’s price after hours of trading. The stock picks up at a point when normal trading gets away. Gaps are created, and these are necessary as they create new support and resistance levels.
Conclusion
Technical indicators are for analysing the price movements of the assets. It can be used with any financial instrument or market. But if we concentrate on the stock market, then there are some of the popular technical indicators.
The article focuses on the 7 popular technical indicators in stock trading. Traders can learn about them, use them and make profitable trades.
