What is a technical indicator?
- A technical indicator is any class of metrics whose value is derived from generic price activity in a stock or asset. Technical indicators look to predict the future price levels, or simply the general price direction of a security by looking at past patterns. In other words, indicators can give you a heads up as to when you should buy and sell. Examples of common technical indicators include Relative Strength Index, Money Flow Index, Stochastics, MACD and Bollinger Bands®.
Which indicator should I use?
Technical indicators are generally divided into the following groups:
- Trend (e.g. Moving Averages, Parabolic SAR); These indicators are used to show and forecast the trend of a stock. Generally, you want to trade with the trend.
- Momentum (e.g. Stochastics, RSI); These indicators are used to show and forecast the momentum of the stock. Generally, you want to trade with the momentum.
- Volatility (e.g. Bollinger Bands®, ATR); These indicators are used to show and forecast the volatility of the stock. Generally, you want to trade a volatile stock. Low volatility usually means narrower price movements.
- Volume (e.g. OBV, Volume); These indicators are used to show and/ or forecast the volume of the stock. This is usually used to show the buying and selling activity in a certain timeframe.
(The excerpts above were taken from Investopedia on June 8, 2017 and part of it is lightly edited)
Different traders use different indicators. Since there are a lot of indicators to choose from, it's hard to say which one is best. You will need to play around with them and see what works best for you. That being said, the examples given above are the more popular indicators in the trading world. Generally, you want to use one indicator from each group. Click here for a comprehensive list of specific trading indicators.
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