When it comes to researching different investments, technical indicators are a great place to start. Today, officials and private traders use technical indicators in their technical analysis to understand trends and behavior in the financial markets.
When considering technical indicators, it is important to understand that technical indicators are derived by using a set of specific data (usually security price). In doing so, one can get a feel for any patterns and trends that may arise, that will absolutely help him to make smart investment choices. Technical indicators are determined using various formulas, and the formula changes depending on the nature of the indicator.
So, why would you want to use technical indicators? Well, technical indicators are a good way to help analyze price actions from different perspectives, and depending on the level of complexity of the formula, you can end up with different ways to look at these price actions.
Types of Technical Indicators
As previously mentioned, there are a few different types of technical indicators. The basic one, called a moving average, involves a simple formula that analyzes the average price of a security or commodity over a period of time, and when isolating time periods, it is much easier to spot different trends. Other types of indicators belong to four major groups, as follows:
- Momentum indicators – Stochastic oscillator, Commodity channel index, RSI, Chande momentum oscillator (CMO) and more.
- Volatility indicators – Bollinger bands, projection oscillator, average true range, Trading bands (envelope) and more.
- Trend indicators – MACD, parabolic SAR, linear regression, Forecast oscillator and more.
- Volume related indicators – Ease of movement, OBV, Demand index, Chaikin money flow and more.
What's the benefit?
So, what's the benefit of using technical indicators? While they by no means represent a complete analysis, they can offer you an opportunity to find areas that are worth closer study based on indication of trends. You want to watch out for which direction the trend seems to be heading.
Although you can use one or more technical indicators to predict future prices, it is by no means 100% accurate as the market is volatile, and anything can happen. So use them as another tool to help confirm results obtained from another means. Certain tools can help you understand if you need to buy or sell your securities or commodities, but without you use multiple means for analysis; your conclusions may not be accurate.
Using Technical Indicators
When it comes to using indicators, it is important to note that most of the formulas for them involve taking derivatives, and this means that the data you get may not be direct. That is why it is extremely important to understand that they by no means indicate the complete picture. The technical indicators may alert you to trends, but you must confirm them with other tools, and in fact, if you use other forms of analysis, your conclusions will be much more accurate.