What is a Technical Indicator?

The purpose of using a technical indicator is to predict future price levels, or the general price direction of a stock, or other security, by looking at past patterns. In other words, indicators are used in technical analysis and they do not analyze any piece of the fundamentals of a company such as earnings, revenue, and profit margins. They are typically used by active traders to analyze short-term price movements in the markets.

Below we provide a quick review of those indicators that we have discussed in previous articles.

Moving Average – The moving average is an indicator that shows the average value of a security’s price over as set period of time. It tracks the trends of a security by smoothing out daily price fluctuations, referred to as “market noise” that can dilute the interpretation of the financial markets. There are different types of moving averages including the Simple Moving Average (SMA), the Exponential Moving Average (EMA), the Weighted Moving Average (WMA), and more.

Stochastics – Stochastics help to determine when a market is overbought or oversold. The assumption, when using stochastics as a technical indicator, is that when a stock is rising it tends to close near the high and conversely, when a stock is falling, it tends to close near its lows. This indicator takes a look at the price action, which is the price at which as stock is traded throughout a daily session.

Fibonacci Numbers – Fibonacci numbers are used to predict price targets and support and resistance targets. These numbers are used as reference points in order to predict retracement versus reversal and they occur is a sequence. Each term, except for the first two terms, is the sum of the previous two terms.

Elliot Wave – The Elliot Wave theory is based on the Dow Theory, but basically it tells us that the market exists is two phases. These phases are the bull market and the bear market. Additionally, there are five waves that occur in the direction of the main trend, and there are three corrective waves. Elliot’s theory is that the movements of the stock market could be predicted through observations and identification of repetitive patterns of waves. These waves are based on cyclic laws in human behavior, also referred to as the psychology of the masses.

Please read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical indicator, such as the moving average convergence divergence , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds .