The use of technical indicators is an area of active research. Technical indicators are mathematical transformations of price and/or volume data. Their purpose is to forecast future market direction or identify current market conditions. There are four main types of technical indicators: trend, momentum, volatility and volume. Each type can be further subdivided into leading and lagging indicators. In this article we will focus on lagging indicators only. (A leading indicator gives signals before the trend changes). The most popular lagging indicators are moving averages, Bollinger Bands, MACD and RSI.
How do you apply these technical indicator? Let us take a closer look at a few examples shall we?
The most common method is to take a simple moving average of prices. Moving averages lag because they smooth out price data. The longer the time period used in the moving average calculation, the greater the lag. Moving average crossover systems buy when the short-term moving average crosses above the long-term moving average and sell when the short-term moving average crosses below the long-term moving average. These systems work best in Apex Trader Funding .
Bollinger Bands place an upper and lower band around a simple moving average with the spacing between the bands determined by standard deviation calculations. Bollinger Bands increase in width when volatility increases and narrow when volatility decreases. These bands can be used as breakout trading system where you buy when prices break out above the upper Bollinger Band or sell when prices break out below the lower Bollinger Band. Alternatively, Bollinger Bands can be used as a contra-trend system to buy when prices reach the lower Bollinger Band or sell when prices reach the upper Bollinger Band
MACD measures the relationship between two exponential moving averages ( typically 12 & 26 periods) and is plotted as a histogram or bar chart. A buy signal is generated when MACD line crosses above signal line while a sell signal is generated when MACD line crosses below signal line. MACD can also be used to identify overbought/oversold condition of markets . When MACD moves above 0 line it suggests that market is overbought while When MACD moves below 0 line it suggests that market is oversold .
RSI measures magnitude & velocity of price changes . It oscillates between 0 to 100 . A reading below 30 suggests that market is oversold while reading above 70 suggests that market has become overbought . A bearish divergence occurs when RSI forms higher highs while underlying security forms lower highs & this bearish divergence if confirmed can lead to sharp reversal in prices . Similarly bullish divergences form when RSI makes lower lows while underlying security forms higher lows & this bullish divergence can lead to nice rally in prices going forward
Conclusion: These were just 4 methods out of many available to help you get started with technical indicators for your future trades. preferring one method over another depends on individual circumstances & objectives . Try different methods , mix & match them & develop your own system which works best for you Thank You For Your Time ! Happy Trading !