Technical analysis is the study of statistics, trends, and other data in order to predict the future performance of a stock. It’s not an exact science, but it can be helpful if you want to get into the mind of traders and find out what they’re most likely thinking about when they make decisions. Technical indicators are mathematical calculations based on historical prices that try to identify when there’s more buying or selling pressure than usual by looking at price levels in relation to each other over time. This post will go over some of my favorite indicators that can help you better understand stocks based on their past performance and potential future movement:
Bollinger Bands®
The Bollinger Bands® indicator is a simple technical analysis tool that helps you identify the volatility of a particular asset. You can use it as an entry indicator for trading or to add context to other technical indicators when making investment decisions.
Bollinger Bands® are named after their creator, John Bollinger, who created this system in the 1980s. The concept behind them is simple: Bollinger sets price bands around a moving average line. These bands expand and contract depending on how volatile prices are over time so that they can distinguish between periods of high and low volatility.
The bands offer four pieces of information:
- They show where prices have been over time (the upper band) and where they could potentially go next (the lower band). This means they give you historical context when trying to make sense of future movement in price action—and make it easier to spot trends before they become apparent!
Relative strength index
The Relative Strength Index (RSI) is one of the simplest yet most effective technical indicators you can use on your stock charts. This indicator uses momentum to measure the strength of a security’s price by comparing it to its own history.
RSI is calculated by dividing the average gain (or loss) over a certain period by the average change (or standard deviation) over the same period. A value below 30 indicates that a stock has been oversold, while values above 70 indicate that a stock is overbought and may be in danger of declining. If you’re interested in learning more about RSI, check out this article from Investopedia, or check out their beginner guide here!
Volume
Volume is a leading indicator of price. As with most indicators, it’s best used in conjunction with other metrics. Volume should be examined at daily or weekly intervals and analyzed alongside the trend line price action to determine if the trend is valid. You can use volume to identify potential support and resistance levels by placing a horizontal line over areas where volume has increased significantly (and often strongly). The amount of volume traded within that timeframe will help you determine how significant those levels are—it’s all about how much movement there was on each side of your pivot point!
Parabolic SAR
The Parabolic SAR indicator is a trend-following indicator, meaning it follows the direction of price and not its absolute value. It measures the rate of change of a security’s price, and not its absolute value. As such, it is best used to identify overbought or oversold conditions in a market.[1]
The Parabolic SAR starts by plotting two lines on top of each other: one line representing an upward trend (known as the signal line) and another representing a downward trend (known as the threshold). The distance between these two lines increases as prices move further away from their original equilibrium point; when prices are considered too far away from their equilibrium point, new signals are formed by extending lines outwards from either end until they intersect again with their respective signal or threshold lines.[2]
Moving averages
Moving averages are a trend-following indicator, which means they’re used to identify current market trends. They can also be used to help determine the direction of the next move by identifying when a trend is ending or reversing.
Moving averages are made up of two lines: a line that represents averages of closing prices over X periods (for example, five days), and another line that shows these same averages as centered on a shorter period (for example, 2 days). When you plot these two lines side by side, it creates an M shaped curve that looks like this:
On-balance volume
On-balance volume is a measure of the total volume on up days and down days. This indicator is calculated by adding the volume on up days to the volume on down days.
On-balance volume can be used as an indicator for momentum because it indicates whether there is more money going into the market than coming out of it, or vice versa. For example, if you have $100 in your bank account and you buy something worth $50, then you will have $150 in your bank account after paying with your debit card. If you then withdraw $25 from an ATM machine, then there should still be $125 left in your account after withdrawing some cash (assuming there wasn’t any interest paid). In this case, more money was being put into than taken out—your balance has increased ($25 + $50 = $75).
Moving average convergence divergence (MACD)
MACD is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs) of prices. The MACD is generally considered to be a lagging indicator because it is based on historical price movements. However, it can also be used to generate trading signals that are useful for both long and short positions.
MACD takes its name from three components: the 12-day EMA, 26-day EMA, and 9-day EMA. By default, these values are set in MetaTrader 4 as follows:
- 12 = 112 * 26 = 526 * 9 = 618
These are the top technical indicators to look at for stocks.
The following are the most popular technical indicators to use in stocks:
- Bollinger Bands® (BB)
- Relative strength index (RSI)
- Volume-based indicators, such as On-Balance Volume (OBV), 3M Moving Average Convergence/Divergence (MACD), Accumulation/Distribution Line, Chaikin Money Flow Oscillator and Accumulation Distribution Line (ADL). These can be used as either standalone or complementary indicators to confirm a market trend by comparing them to price action on a chart; when they align with price action it’s often an indication of an imminent reversal at hand or interim top/bottom in a trend. A number of these signatures include relative strength gauges that measure how overbought or oversold stocks are at any given time—a useful metric for traders looking for buy signals since it shows how overbought stocks are before entering into long trades or short ones if oversold conditions persist
Conclusion
As you can see, there are a lot of different indicators to choose from. But don’t let that overwhelm you! By using these tools wisely and keeping an eye on them every day, you can make better decisions about which stocks to buy or sell.
Disclaimer: The views and opinions, as well as all the information shared in this price prediction, are published in good faith. Readers must do their research and due diligence. Any action taken by the reader is strictly at their own risk. Radu Stoia and its affiliates will not be held liable for any direct or indirect damage or loss.
