Indicator's Basic's

TECHNICAL INDICATOR’S

When analyzing a stock, we need to know,

Whether a stock is trending up, trending down or ranging

Strength of the trend in stock, momentum.

Overbought & Oversold levels in a stock or index

Trend reversal signals

Volatility

All this we can do with the help of various technical indicators

INDICATOR BASICS:

Many indicators are available in market for use. Our aim is to master a few of them & select a few such that each caters to a difference & specific purpose. Then we focus on the selected group & get the most out of its combined progressive signals.

Use of Indicators in different market conditions.

Trending vs Ranging Markets

It is important to first identify whether the market is trending or ranging and to employ indicators suited to the purpose:

No one indicator is suited to all market conditions.

Indicators act differently in different market conditions. An indicator may act well in a trending market, but the same indicator may fail altogether in providing profitable signals in ranging markets.

For example, Trend indicators fail to give profitable signals in ranging market. Fluctuations in a narrow price range produce too many useless signals that tend to result in whipsaw.

In a trending market, momentum indicators can remain in overbought range for a longer period, so the interpretation of the same changes. In such periods, it should be used as confirming indicators to trend indicators.

Three Main Functions of Indicators

PREDICT

ALERT

CONFIRM

Note: Select one indicator which will act as a primary signal indicator to go long or short and rest of the indicators signals will act as confirming signals on progressive basis.

INDICATOR TIME FRAME’S

Indicators should be adjusted to reflect the cycle being studied

The same general rule applies to moving averages and oscillators.

With trend indicators, make the window period longer;

With oscillators, make the period shorter.

For example in case of Moving Averages one can use following time frames

200 Day (40 Week) MA's are popular for tracking longer cycles;

20 to 65 Day (4 to 13 Weeks) MA's are useful for intermediate cycles; and

5 to 20 Days for short cycles.

Type of Indicators:

Trend Indicators

Momentum Indicators

Overbought & Oversold range indicators

Volatility Indicators

TREND INDICATORS

They are lagging indicators.

In trending market:

They indicate trend,

As well as acts as support & resistance.

In ranging market:

Should be used to know support & resistances,

Do not use for getting buy & sell signals from it.

Couple of most popular TREND INDICATORS are mentioned below.

1. Moving Averages.

2. MACD.

Use Trend Indicators,

To know established Uptrend or Downtrend: USE trend indicators to check the validity of the trend in trending market.

Trend remains intact as long as major moving averages are respected.

Trend Reversal: When such averages are broken, trend reversal is witnessed.

To know support & resistances: Underlying instruments tend to take repeated supports on its major respected moving average.

To get Buy & Sell Signals: USE trend indicators in trending market to getting short term buy & sell signals that enable us to take position in the direction of the already established long term trend.

MOMENTUM INDICATORS

Explanation:

Generally speaking momentum measures the rate-of-change of a security’s price.

As the price of a security rises, price momentum tends to increase.

The greater the momentum signals, the faster the security rise.

Once there is signal of decrease of momentum in such indicators, price rise intensity tends to fade.

As a security begins to trade flat, momentum starts to actually decline from previous high levels.

However, declining momentum in the face of sideways trading is not always a bearish signal.

Some MOMENTUM INDICATORS that we will study are mentioned below.

1) Relative strength index

2) ROC

3) Stochastic Oscillator

OVERBOUGHT & OVERSOLD RANGE INDICATORS

A stock when in a long term established trend tends to develop short term range bound movements for some period before resuming its longer term trend. Some indicators can help us know such short term overbought & oversold regions.

Indicators that help us do this are,

1) RSI

2) Stochastic

The above indicators are oscillators and in ranging markets, they oscillate between oversold & overbought ranges & produce profitable signals. They tend to indicate potential turning points, from the levels of such unsustainable optimism or pessimism. They are useful in a different way in trending market.

Note: The same indicators as you must have noticed, acts as momentum indicators in trending market. They indicate trend by crossing certain levels, and by remaining above certain levels for longer period. They fail to generate any further signals than that.

VOLATILITY INDICATORS

Volatility indicators, attempts to measure the volatility of a security's price action.

Unskilled traders fear volatility, but trained and skilled day traders prefer increased volatility as when the price are more volatile, more money can be made in a short time.

Some most popular Volatility indicators are mentioned below

1. Bollinger Bands

2. Relative Volatility Index