In the technical analysis based on price data, indicators are very important in terms of the information they give to investors. Here’s what you need to know about it. Price movements in financial markets affect investors emotionally and enable them to make buying and selling decisions. In this context, movements are interpreted using some analysis tools. Technical analysis indicators give information about prices. They usually show the trend and buy-sell situations based on past movements. Now let’s examine what is indicator, the most used types, and features.
What is Indicator?
Indicators also referred to as indicators, are analysis tools used to understand price movements. They give buy and sell signals about instruments.
They are important aids for investors when making investment decisions. Price and volume data are used in its calculation. Generally, it gives more accurate results when several of them are used at the same time.
Some give signals before the event occurs, and some indicators allow the effects to be seen later. Leading indicators are those who try to inform the change of direction in the market before the events occur.
Pioneers use data that relates demand to prices and leverages volume. They try to predict the change in the intensity of buying or selling in the market. In other words, they enable the prediction of the direction of the price.
Aftershocks try to confirm the changing direction of the price. They examine the relationship between various price averages. They also use short- and long-term comparisons.
Aftershocks examine whether the current price change is a temporary situation. It also tries to understand if there is a long-term new beginning.
Grouping can also be done in terms of operation. Those who try to understand the trend and its changing direction can be described as a group.
Oscillators that try to determine buy and sell points by producing results from price oscillations can be considered as another group.
Most Used Indicators in Technical Analysis
We said that the indicators are grouped according to their properties and the information they give. In this context, we can list the most used indicators with 4 different groups.
They indicate when the trend direction will change. They also indicate the strength of the current indicator. However, before using them, it is necessary to mention the existence of a trend.
Their use in horizontal markets is not beneficial. The most commonly used are MACD, SAR, CCI, and moving averages.
The moving average is the indicator referred to as convergence and divergence. It is a tool that gives reliable results. It is generally used for medium-term transactions.
It consists of two moving averages, fast and slow. It also has 2 important components called signal line and histogram.
It serves to measure both the direction and change of the trend. The MACD, which is located under the price chart, is followed by its chart. Here, it shows the trend change by moving into the negative and positive areas.
It is one of the works of Welles Wilder, the creator of the RSI indicator. It consists of the initials of the words Stop and Reversal.
A buy-sell signal is received according to the position of the dotted line following the trend above and below the price. If the line goes up when the price is below the price, it is interpreted as a sell signal, if it goes down when it is above the price, it is interpreted as a buy signal.
It is useful to use with another tool that measures the strength of the trend before it is applied. that is, the presence and speed of the trend can be measured by using it with an auxiliary indicator.
It is the most basic tool and forms the basis of all others. It is used to average the price of the last X period. The current price level is marked by taking the average of a certain number of price data for the past.
It is the most used indicator on price charts. Periods can be changed according to the user. Sensitivity is increased with the number of samples made in the past.
They are divided into 3 as simple, exponential, and weighted moving averages. When two different averages are applied together, an interpretation is made according to their crossing over each other.
It was developed for commodity markets. An abbreviation for Commodity Channel Index.
The American analysis was developed by Donald R. Lambert. Its basis is to calculate the average and deviation of price movements for the last n periods. In this way, it is determined how far the current price is from this average.
In a selected period the highest, lowest, and closing prices of the days are included and divided. In other words, the price has the middle value in the relevant period.
Then the arithmetic average of all prices is taken. This value is used as a deviation indicator for each period. Deviation of all periods from this mean value is found and absolute values are taken as a result.
They are buying and selling channels drawn with the help of standard deviation, depending on price changes. When we say channels, Bollinger Bands come to mind first. This is the most commonly used indicator.
It is an indicator of markets with high volatility. It was developed by John Bollinger in 1980.
It has an effective use to generate buy-sell signals. Also known as the volatility band. Indicates whether prices are relatively high or low.
It gives information about price squeeze and targets. It also measures volatility in movements. It shows accurate results when used correctly.
Similar to Bollinger bands. But it is quite different in the way it is created and calculated. But this does not mean that it is a difficult indicator.
The price of an instrument is smoothed by moving averages of different periods. That is, by finding the upper and lower bands, a bond is formed.
The tool optimally mimics the oscillations of price movements. It creates the band by shifting the optimum moving average period up and down.
It is another tool developed by Welles Wilder. It is an abbreviation of the words Average True Range.
Transactions are made over 14 days. The purpose of the tool is to ignore the movement direction of the instruments and deal with price changes.
It is a group that covers instruments generally used in horizontal markets. They examine whether there are overbought and oversold in such markets.
It is useful for markets that are not trending and move within a certain band. The most used tools; Stochastic and RSI.
Its success is one of the approved indicators. It measures closing prices for a selected period based on daily highs and lows. Indicates the turning points of prices.
They provide information about the current market situation. Compares the closing prices for the selected period with the highs and lows.
They fluctuate above and below a central line, signaling the trader.
It gives overbought and oversold signals. It also shows in which direction the price is trending.
It is a tool developed by Welles Wilder in 1978. It takes a value between 0 and 100. The limits are set as 30 and 70.
The direction of the trend is determined according to whether the indicator is below 30 and above 70. 30 is an oversold signal while 70 is overbought.
It shows the trading volumes of financial instruments. Price action is supported by strong volume. In this way, it gives much stronger signals.
The most used are; is called Money Flow Index and Force Index.
Money Flow Index
It is denoted by MFI for short. It is used frequently. It is similar to RSI but with different features. The difference is that the volume is also taken into account.
MFI also takes a value between 0 and 100. The limits are set as 20 and 80. Levels below 20 are considered oversold areas, while areas above 80 indicate overbought.
It measures the amount of power used to carry the price of an asset.
Developed by Trader Alexander Elder. It was mentioned in the book Trading for the Living, published in 1993.
The strength index uses price and volume to determine the amount of power behind price action. It fluctuates between positive and negative zones. The volatility of the index is unlimited.
SEE MORE: Forex Technical Analysis 101