What Are the Most Common Trading Indicators?

All markets experience repeating patterns and cycles. The question is, how can a trader spot them?

There is fundamental analysis, but despite the fact that it is very numbers-based, it can still be quite inconclusive. Technical analysis is the alternative method of looking at markets, and while it also be subjective, it tends to give a clearer picture of the state of the market for the experienced technical trader.

The most important part of technical analysis is by far the use of technical indicators. Let’s explore the most common indicators in this article.

Technical indicators are mathematical representations of fluctuations in financial market asset prices, which lead to patterns and potential signals.

Using historical price data, technical indicators can show things such as:

• Momentum
• Volume
• And/or Open interest

An understanding of how these indicators work can help market participants understand price movements.

Technical indicators are based on trends mathematical formulas, which when looked at through the lens of statistics, can potentially be insightful.

It is entirely different from finding the so-called intrinsic value of a security, which is primarily based on fundamentals such as the financials of the company. 

A technical indicator can give a trader confidence in a trade by plotting the strength or weakness of its price movements.

Types Of Technical Indicators

There are a few different types of indicators, the main ones being:

1. Overlays

The overlay indicators scale and fit with the price chart of the securities. These are overlaid on the chart showing price movements of the securities and help to identify:

• The prevailing trend in the market
• Its trading range, and
• Support and resistance levels of the security

Some common overlay indicators include Bollinger bands, Pivot points, and Moving averages. 

2. Oscillators

Oscillator indicators are visual tools that establish a price range of the security in question. They indicate the two extreme values and oscillate between these two established bounds. 

Such indicators help traders to identify whether an asset is overbought or oversold. 

Typically, a security is considered to be:

• Overbought at the upper price range 

and

• Oversold at the lower price range

The two most common oscillator indicators are the MACD and RSI.

All technical indicators aim to identify the future price movements using the current price’s relation to its historical average. 

A good understanding of the calculations behind these indicators can help the trades that want to implement them in their trading strategies apply them more effectively. 

Here are 8 of the most commonly used trading indicators:

1. Moving Averages

This is one of the simplest technical indicators, and helps with identifying the prevailing trend in the market.

MAs simply determines an average of the closing prices of the securities a period of time. For example, a 200-day moving average will use and average the closing prices of the past 200 days and plot it as a line. If the line is sloping up, and especially if price is very high above the moving average, then the asset is considered to be in a uptrend (and vice versa for a downward sloping moving average).

2. Stochastic Oscillator

This indicator operates on a scale of 0 to 100 and plots the closing price of an asset in comparison to its range. 

The rules of thumb for the stochastic oscillator are as follows:

3. MACD

The Moving Average Convergence Divergence (MACD) is a technical indicator widely used to study the various changes in the momentum exhibited by prices. It compares two moving averages and uses this to show the momentum of the asset being analysed. 

The logic behind MACD is as follows:

4. Bollinger Bands

This indicator is used to compare an asset’s current price relative to its historical volatility. It does so by showing a range with an upper band and a lower band. 

The most basic interpretation of Bollinger Bands for volatility is:

5. Relative Strength Index (RSI)

An RSI indicator operates on a scale of 1 to 100 and measures momentum. It is often used to look for divergences between the direction of price and the direction of the indicator.

It can be also used as an overbought/oversold indicator as follows:

6. Fibonacci Retracements Levels

Based on the Fibonacci sequence of numbers inherent in price fluctuations, this indicator attempts to find a security’s support and resistance level.

It is often used to find potential entry points for pullbacks in an already identified trend.

7. Standard Deviation (SD)

SD is another widely used technical indicator for determining the volatility of the the market. It compares takes price movements to identify current volatility levels relative to historical levels.

SD assumes a normal distribution of financial markets returns, something to bear in mind if using it for risk calculations.

8. On-Balance-Volume (OBV)

This indicator uses trading volumes to anticipate future price movements. Developed by Joseph Granville, the OBV indicator assumes that all significant moves in the market are due to the changes in the trading volume. 

Traders traditionally look to the OBV indicator for the following signals:

An ability to understand the various technical indicators available out there can helps traders get a hold of concepts like momentum and volatility that exist in the market. 

Armed with this knowledge, it can be the first step in choosing a trading strategy.

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