Module 3. Technical Indicators

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Introduction

Before we start it needs to be noted that some analysts don't place too much emphasis on certain technical indicators (i.e price oscillators), as they really only visually represent what many analysts already know.  By focusing on price action (candlestick and chart patterns) and the psychology of the market (by utilising support & resistance, trend lines and volume) these analysts believe they can better predict future price movement to determine their trading strategies. Module 1, 2,  5 and 6 deal with these important concepts.  For the inexperienced though, I see them as beneficial instruments to help read the market until you come to recognise what's happening to price yourselfwhich hopefully will come in time.  I also believe that they can add value and clarity to price action, allowing traders to visualise the whole picture.  In fact many traders will concentrate on price action, but maybe utilise an oscillator as part of their trading system.

So, what are we going to discuss in this chapter?  We’re going to look at what technical indicators are and how traders utilise these indicators for their trading purposes. On the whole indicators are mathematical formulas, which are derived from price action of a financial market and the buying and selling volumes of these financial markets. These indicators are then used with other forms of technical analysis (e.g. chart patterns) to predict future price movements and assist us with our trading strategies. 

Technical indicators are distinguished by the fact that they do not analyze any part of the fundamental business, like earnings, revenue and profit margins. Technical indicators are used most extensively by active traders in the market, as they are designed primarily for analyzing short-term price movements. To a long-term investor, technical indicators are there to help identify good entry and exit points for the stock by analyzing the long-term trend.

Pictorially, technical indicators are the squiggly lines found above, below and on-top-of the price information on a technical chart. Indicators that use the same scale as prices are typically plotted on top of the price bars and are therefore referred to as "Overlays."  This section describes the various kinds of technical indicators and overlays that are available to analysts.

Leading and lagging indicators

Technical indicators are broken down into 2 categories – Leading indicators and lagging indicators.  Leading indicators try to signal future price action and lagging indicators tell you where the market has been and where it’s likely to go as a result - both have their positives and negatives.  Leading indicators try to gauge future movements from relatively recent data and tend to generate lots of buy and sell signals so are prone to use in range bound markets. Leading indicators generate more faults than lagging indicators as a result of producing more buy/sell signals. On the other hand lagging indicators are used by trend market followers and are of little use in range bound markets. They are designed to help you catch and stay with the trend and they generate less buy/sell opportunities than leading indicators do. They produce fewer faults, but get you into the move later than leading indicators.

The above paragraphs are just a brief outline of indicators and we'll go on to study the most popular indicators in the rest of this module.  Below I've highlighted the indicators we'll study, but there are many more out there that may be useful to your trading strategy. 

Contents: 

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Introduction

Before we start it needs to be noted that some analysts don't place too much emphasis on certain technical indicators (i.e price oscillators), as they really only visually represent what many analysts already know.  By focusing on price action (candlestick and chart patterns) and the psychology of the market (by utilising support & resistance, trend lines and volume) these analysts believe they can better predict future price movement to determine their trading strategies. Module 1, 2,  5 and 6 deal with these important concepts.  For the inexperienced though, I see them as beneficial instruments to help read the market until you come to recognise what's happening to price yourselfwhich hopefully will come in time.  I also believe that they can add value and clarity to price action, allowing traders to visualise the whole picture.  In fact many traders will concentrate on price action, but maybe utilise an oscillator as part of their trading system.

So, what are we going to discuss in this chapter?  We’re going to look at what technical indicators are and how traders utilise these indicators for their trading purposes. On the whole indicators are mathematical formulas, which are derived from price action of a financial market and the buying and selling volumes of these financial markets. These indicators are then used with other forms of technical analysis (e.g. chart patterns) to predict future price movements and assist us with our trading strategies. 

Technical indicators are distinguished by the fact that they do not analyze any part of the fundamental business, like earnings, revenue and profit margins. Technical indicators are used most extensively by active traders in the market, as they are designed primarily for analyzing short-term price movements. To a long-term investor, technical indicators are there to help identify good entry and exit points for the stock by analyzing the long-term trend.

Pictorially, technical indicators are the squiggly lines found above, below and on-top-of the price information on a technical chart. Indicators that use the same scale as prices are typically plotted on top of the price bars and are therefore referred to as "Overlays."  This section describes the various kinds of technical indicators and overlays that are available to analysts.

Leading and lagging indicators

Technical indicators are broken down into 2 categories – Leading indicators and lagging indicators.  Leading indicators try to signal future price action and lagging indicators tell you where the market has been and where it’s likely to go as a result - both have their positives and negatives.  Leading indicators try to gauge future movements from relatively recent data and tend to generate lots of buy and sell signals so are prone to use in range bound markets. Leading indicators generate more faults than lagging indicators as a result of producing more buy/sell signals. On the other hand lagging indicators are used by trend market followers and are of little use in range bound markets. They are designed to help you catch and stay with the trend and they generate less buy/sell opportunities than leading indicators do. They produce fewer faults, but get you into the move later than leading indicators.

The above paragraphs are just a brief outline of indicators and we'll go on to study the most popular indicators in the rest of this module.  Below I've highlighted the indicators we'll study, but there are many more out there that may be useful to your trading strategy. 

Contents: 

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