A technical indicator is a mathematical tool applied to price and volume data, and it can also be applied to other indicators.
The result is a value that helps predict future price changes.
These indicators appear as lines or curves on charts, positioned above, below, or over price information. They are commonly used by traders who rely on technical analysis to gain a unique perspective on the strength and direction of price movements.
By analyzing past data, technical indicators allow analysts to forecast future price actions. They serve three primary functions: alerting traders to specific conditions, predicting price directions, and confirming analysis based on current price trends or other indicators.
Categories of Technical Indicators:
There are two main categories of technical indicators:
Leading Indicators provide signals when a new trend is about to begin. Popular examples include MACD, RSI, and Stochastic, which measure whether an asset is overbought or oversold, assuming a rebound will follow.
Lagging Indicators follow price movements, indicating trends after they start. The Moving Average is a common example, offering guidance on what prices are doing—rising or falling—so that traders can act accordingly. Although lagging indicators might cause traders to miss early opportunities, they reduce risk by keeping traders aligned with the market.
The general strategy involves using lagging indicators in trending markets and leading indicators in sideways markets.
Chart Placement of Technical Indicators:
Technical indicators on a chart fall into two classes:
- Overlays: Indicators plotted over the price chart, sharing the same scale. Examples include Moving Averages and Bollinger Bands.
- Oscillators: Indicators that oscillate between a local minimum and maximum, plotted above or below a price chart. Examples include MACD, RSI, and Stochastic.
Types of Technical Indicators:
There are four main types of technical indicators:
Trend-Following Indicators: These help traders identify trends in currency pairs, indicating trend direction and strength. Examples include Moving Averages, MACD, and Parabolic SAR.
Momentum Indicators: These indicators gauge the speed of price movements over time, often appearing as lines that oscillate below a price chart. Examples include Stochastic, CCI, and RSI.
Volatility Indicators: These measure the rate of price changes, regardless of direction, providing insights into market volatility. Examples include Bollinger Bands, Average True Range, and Standard Deviation.
Volume Indicators: These assess the strength of trends or confirm trading directions by analyzing volume. Examples include Chaikin Money Flow, On Balance Volume, and Volume Oscillator.
