Using Technical Indicators for Trading Markets
Choosing Tools to Measure Market Activity Provides a Trading Edge
Feb 25, 2009 Harry P. Schlanger
Technical analysis is a common method traders employ to evaluate price direction of a security, using chart patterns and/or mathematical indicators.
There are literally hundreds of technical indicators available, but no single magical indicator that will unlock the secrets of the market. Rather, a wise selection of these can be used to gauge the underlying psychology of the market.
Various indicators have a variety of strengths and weaknesses. Some work exceptionally well in trending markets, some do not. Many will indicate when to enter and exit the market at significant points, such as at tops and bottoms. Some will whipsaw around wildly. Indicators come as a package and the trader must use a combination of techniques, choosing those with strengths to suit particular conditions.
Technical Indicator Types
The share traders Compton & Kendall provide an extensive list of technical indicator types, such as: trend, volatility, momentum, cycles, market strength, and support/resistance. Some of these indicators are listed below:
Trend indicators: to help the trader in determining the direction of the market
- Moving averages
- Price oscillator
- MACD
- Trendlines
- Time Series Forecast
Volatility Indicators: to measure the size of day-to-day fluctuations in share prices.
- Bollinger Bands
- Standard Deviation
- Chaikin’s Volatility
- Average True Range
Momentum Indicators: to measure the speed at which prices are changing. These are oscillators that bring awareness to price extremes and divergences, and reversals in the trend.
- Accumulation Swing Index
- MACD
- Price Oscillator
- Williams %R
- Relative Strength Index (RSI)
Cycles: knowledge of cycles can help assess the probability of a continuation or reversal of a trend.
- Cycle Lines
- Detrended Price Oscillator
- Fibonacci Time Zones
- Fourier Transform
Market Strength Indicators: measure the degree of participation in the market. Market strength assesses the likelihood of a continuation or reversal of trend.
- Accumulation/Distribution
- On Balance Volume
- Volume Oscillator
- Chaikin A/D Oscillator
- Money Flow Index
Support and Resistance Lines: these lines measure the tendency for prices to rise and fall between certain levels. Their importance cannot be over emphasised.
- Trendlines
- Gann lines, Fans, Grids
- Fibonacci Arcs, Fans, and Retracements
- Andrews Pitchfork
Price-Time-Volume Categories
According to trading strategist William F. Eng, technical analysis tools are best used in a multidimensional way - choosing one from each group, categorized according to Price, Time and Volume:
Price Sensitive Indicators
- Moving Averages
- Relative Strength
- Percentage R
- Oscillators
- Stochastic
Time Sensitive Indicators
- Astronomical Cycles
- Elliott Wave Theory
- Gann Analysis
Volume Sensitive Indicators
- Tic Volume
- On-Balance Volume
- Bar Charts
Technical Indicators for Trading Edge
Large portions of market traders prefer to use technical indicators to seek trading opportunities with a trading edge. The multitude of existing technical indicators can overwhelm the novice trader. However, many indicators measure the same thing so that traders only need to choose from each group.
Many of the above technical indicators are illustrated with charts in the references cited below. Readers are directed to view the references or visit wikipedia for a mathematical explanation and visual representation of some of these.
References:
- “Behaviour of Technical Indicators in Market Stages”. William F. Eng, in “High Performance Futures Trading – Power Lessons from the Masters”. Ed. Joel Robbins. Probus Publishing, Chicago, 1990.
- “Trading With a Plan”. Tony Compton & Eric Kendall. Wrightbooks, Elsternwick, Australia, 2000.
Exponential Moving Average
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