Market Updates

Introduction to Technical Indicators, Overlays and Oscillators

— July 28, 2017 add comment

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Introduction to Technical Indicators, Overlays and Oscillators

[/vc_column_text][vc_column_text css_animation=”fadeIn”]This section has been created to introduce the basic concepts of technical indicators, overlays and oscillators in an easy to understand way explaining how to apply them in during your analysis of charts. We will be covering everything from the leading and most popular indicators to the more uncommon indicators going through in detail their strengths and weakness as well as teaching you exactly how and when to use them to better determine both entry’s and exits of trading positions.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

What Is a Technical Indicator?

Technical indicators are a series of data points that are derived by applying a formula to the price data of an underlying security.

Price data can included a number of combination of the open, high, low or close over a given period of time. Some indicators may use only the closing prices, while others may incorporate volume or other factors into their formulas. The price data is entered into the formula and a data point is produced.

For example, the average of 3 closing prices is one data point [ (41+43+43) / 3 = 42.33 ]. However, one data point does not offer much information which doesn’t really make an indicator. A series of data points over a period of time is required to create valid reference points to enable proper analysis. By creating a time series of data points, a comparison can be made between present and past levels. For analysis purposes, technical indicators are usually shown in a graphical form either above or below a price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

What Does a Technical Indicator Offer?

Technical indicators offer traders  different perspectives from which to analyse the price action. Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand forming additional lines on the chart which allow us to see how well the underlying asset has been doing over a set period of time. Others such as Stochastics, have complex formulas and require more study to fully understand and appreciate. Regardless of the complexity of the formula, technical indicators can provide a unique perspective on the strength or weakness as well as the direction of the underlying price action.

A simple moving average is an indicator that calculates the average price of a security over a specified number of periods.

When dealing with charts that are exceptionally volatile such as sketchy biotech or penny stocks moving averages can help to smooth out the line in an eye on the eyes way. Moving averages filters out random spiky price action and giving us a smoother perspective of the price action.

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Why Should We Use Indicators?

Indicators serve as three broad functions for traders: to alert, to confirm and to predict.

  • An indicator can act as an alert giving traders the ability to take a closer look at price action. If momentum is waning, it may be a signal to watch for a break of support. Or, if there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout.
  • Indicators can also be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Or, if a stock breaks support, a corresponding low in the On-Balance-Volume (OBV) could serve to confirm the weakness point to watch out for.
  • Finally many investors and traders use indicators to help predict the direction of future prices in near or long term trading.

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Technical Indicators

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Technical Overlays

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Technical Oscillators

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