From our What is technical analysis in trading blog post, you may already know that technical indicators are mathematical calculations that can help you predict the price movements of an asset. These calculations evaluate an asset from multiple angles and can become a really powerful tool, providing valuable insights and helping you step up your trading strategies.
There are dozens of indicators you can use, but they are usually divided into groups by the type of information they provide. Some indicators may provide multiple sets of information and can therefore belong to more than one group.
In this blog, we’ve grouped indicators into 4 main types and briefly explain how each group helps traders identify trading opportunities.
1. Trend indicators
In trading, trend refers to the direction of the price movement over an extended period of time. For example, when the price is consistently increasing, it’s an uptrend, and when it’s decreasing, it’s a downtrend.
Trend indicators can help determine the direction the market will take.
Some common trend indicators are:
– Moving average (MA)
– Parabolic stop and reverse (Parabolic SAR)
– The Ichimoku Cloud
2. Volume indicators
In trading, volume refers to the number of trades executed within a particular time frame. It’s a direct indication of the asset’s supply and demand.
By measuring the volume of trading, volume indicators indicate whether a trend is likely to last.
For example, high volume on the uptrend indicates high demand and therefore, a further price increase. It works the same way in the reversed scenario: high volume on the downtrend indicates high supply and a likelihood of a further price drop.
Some common volume indicators are:
– On balance volume (OBV)
– Accumulation / Distribution indicator
– Money flow index
3. Volatility indicators
Volatility in trading determines the degree to which a price moves over time. High volatility indicates fast and unpredictable price changes. Volatility indicators measure the price range of an asset and help to catch the moments of high volatility.
Many traders favour highly volatile assets and markets because they present numerous trading opportunities along with faster and higher gains.
The most common volatility indicators are:
– Bolinger bands
– Donchian channel
– Average true range (ATR)
4. Momentum indicators
Momentum in trading refers to the speed of the price change. Momentum indicators measure this speed, which can be helpful to see an upcoming trend change.
The most common momentum indicators are:
– Relative strength index (RSI)
– Moving average convergence divergence (MACD)
– Stochastic oscillator
What is the best way to use technical indicators?
When traders use technical indicators, they usually apply 2-3 of them at once and compare their findings to increase the likelihood of making a correct trading decision. For example, if a trend indicator predicts the change of trend, they check the volume as well to make sure there is enough buying or selling power to support this change. But it’s important to remember that technical indicators, just like chart patterns, are still a prediction and don’t give 100% accuracy.
It’s also always a good idea to test and try different combinations on your risk-free demo account first before trading with real money.
Alternatively, if you want to know another non-technical way of analysing financial markets, head to our Fundamental analysis blog post and find out how major political and economic events can affect prices.