Introduction
In this module, we will learn everything about indicators and oscillators used in the study of technical analysis. Technical indicators are mathematical calculations based on historic price, volume, the open interest that aim to forecast the direction of financial securities. So, let us start our journey on learning the several technical indicators majorly used by market experts all over the world.
What are indicators and Oscillators?
Indicators are mathematical calculations based on the price and the volume of a security that measure factors as money flow, trends, volatility, and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities.
The main uses of technical indicators are:
- It helps us in confirming the price movements and pattern formations on charts.
- It helps us by generating buy and sell signals.
Indicators are used to identify buy and sell signals in technical analysis through crossovers and divergence.
Note: There are also two broad categories of technical indicators that we will learn in the next unit.
Crossovers are the most popular and are reflected when either the price moves through the Moving average, or when two different moving averages cross over each other.
Divergences happen when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. This signals to the indicator users that the direction of the price trend is weakening.
Oscillators are indicators which vary over time within a band that may be above and below a center line, or between levels. They are range bound, for example between zero and 100, and have signal periods where the security is overbought (near 100) or oversold (near zero).Some of the examples of oscillators are MACD, ROC, RSI, CCI
Indicators that are used in technical analysis provide an extremely useful source of additional information. These Indicators help identify momentum, trends, volatility and various other aspects in a security to aid the technical analysis of trends. It is important to note that while some traders use a single indicator solely for buy and sell signals, these are best used in conjunction with price movement, Chart Patterns and other Indicators.
Some of the Technical Analysis Indicators:
Moving averages: One of the most common and familiar trend-following indicators is the moving averages. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays
Relative Strength Index (RSI): RSI is a momentum oscillator generally used in sideways or ranging markets where the price moves between support and resistance levels. It is one of the most useful technical tool employed by many traders to measure the velocity of directional price movement.
Bollinger Bands: Bollinger bands are trading bands developed by John Bollinger. It consists of a 20-period simple moving average with upper and lower bands. The upper band is 2 standard deviations above the moving average and similarly the lower band is 2 standard deviations below the moving average. This makes these bands more dynamic and adaptive to volatility.
Money Flow Index: Money flow index takes into account volume action and on the basis of volume action; it attempts to measure the strength of money flowing in and out of the security which nowadays is also known as smart money flow indicator.
Though we have discussed a few popular technical indicators in the above section, these are not all. There are thousands more, so before we dig deep into the module, let us first divide these indicators into broad categories. What are those? We will discuss them in the next unit.
