Best stock trading technical indicators

However, when sellers force the market down further, the temporary buying spell comes to be known as a dead cat bounce.

Trading indicators explained

Proponents of the theory state that once one of them trends in a certain direction, the other is likely to follow. Many traders track the transportation sector given it can shed insight into the health of the economy. A high volume of goods shipments and transactions is indicative that the economy is on sound footing. A similar indicator is the Baltic Dry Index.

Doji — A candle type characterized by little or no change between the open and close price, showing indecision in the market. Elliott wave theory — Elliott wave theory suggests that markets run through cyclical periods of optimism and pessimism that can be predicted and thus ripe for trading opportunities. Harmonics — Harmonic trading is based on the idea that price patterns repeat themselves and turning points in the market can be identified through Fibonacci sequences. Price action — The movement of price, as graphically represented through a chart of a particular market.

Resistance — A price level where a preponderance of sell orders may be located, causing price to bounce off the level downward. Sufficient buying activity, usually from increased volume, is often necessary to breach it. Retracement — A reversal in the direction of the prevailing trend, expected to be temporary, often to a level of support or resistance. Support — A price level where a higher magnitude of buy orders may be placed, causing price to bounce off the level upward. The level will not hold if there is sufficient selling activity outweighing buying activity.

Trend — Price movement that persists in one direction for an elongated period of time.

Technical indicators fall into a few main categories, including price-based, volume-based, breadth, overlays, and non-chart based. Coppock Curve — Momentum indicator, initially intended to identify bottoms in stock indices as part of a long-term trading approach. MACD — Plots the relationship between two separate moving averages; designed as a momentum-following indicator.

Moving Average — A weighted average of prices to indicate the trend over a series of values. Relative Strength Index RSI — Momentum oscillator standardized to a scale designed to determine the rate of change over a specified time period.

Stochastic Oscillator — Shows the current price of the security or index relative to the high and low prices from a user-defined range. Used to determine overbought and oversold market conditions. Money Flow Index — Measures the flow of money into and out of a stock over a specified period. Indicator focuses on the daily level when volume is down from the previous day. On-Balance Volume — Uses volume to predict subsequent changes in price. Proponents of the indicator place credence into the idea that if volume changes with a weak reaction in the stock, the price move is likely to follow.

Focuses on days when volume is up from the previous day. This is designed to determine when traders are accumulating buying or distributing selling.

For example, when price makes a new low and the indicator fails to also make a new low, this might be taken as an indication that accumulation buying is occurring. Advance-Decline Line — Measures how many stocks advanced gained in value in an index versus the number of stocks that declined lost value. Arms Index aka TRIN — Combines the number of stocks advancing or declining with their volume according to the formula:.

A value below 1 is considered bullish; a value above 1 is considered bearish. Volume is measured in the number of shares traded and not the dollar amounts, which is a central flaw in the indicator favors lower price-per-share stocks, which can trade in higher volume. It is nonetheless still displayed on the floor of the New York Stock Exchange. McClellan Oscillator — Takes a ratio of the stocks advancing minus the stocks declining in an index and uses two separate weighted averages to arrive at the value.

Best used when price and the oscillator are diverging. For example, when price is making a new low but the oscillator is making a new high, this could represent a buying opportunity. Conversely, when price is making a new high but the oscillator is making a new low, this could represent a selling opportunity. Bollinger Bands — Uses a simple moving average and plots two lines two standard deviations above and below it to form a range. Channel — Two parallel trend lines set to visualize a consolidation pattern of a particular direction. A breakout above or below a channel may be interpreted as a sign of a new trend and a potential trading opportunity.

Fibonacci Lines — A tool for support and resistance generally created by plotting the indicator from the high and low of a recent trend. Moving Average — A trend line that changes based on new price inputs. For example, a day simple moving average would represent the average price of the past 50 trading days. Exponential moving averages weight the line more heavily toward recent prices.

Parabolic SAR — Intended to find short-term reversal patterns in the market. Generally only recommended for trending markets. Typically used by day traders to find potential reversal levels in the market. Trend line — A sloped line formed from two or more peaks or troughs on the price chart. A break above or below a trend line might be indicative of a breakout.

Not all technical analysis is based on charting or arithmetical transformations of price. Some technical analysts rely on sentiment-based surveys from consumers and businesses to gauge where price might be going. If a stock finishes near its high, the indicator gives volume more weight than if it closes near the midpoint of its range.

If the indicator line is trending up, it shows buying interest, since the stock is closing above the halfway point of the range. This helps confirm an uptrend.

This helps confirm a downtrend. The average directional index ADX is a trend indicator used to measure the strength and momentum of a trend. When the ADX is above 40, the trend is considered to have a lot of directional strength, either up or down, depending on the direction the price is moving. When the ADX indicator is below 20, the trend is considered to be weak or non-trending.

The ADX is the main line on the indicator, usually colored black. There are two additional lines that can be optionally shown. These lines are often colored red and green, respectively. All three lines work together to show the direction of the trend as well as the momentum of the trend. The Aroon oscillator is a technical indicator used to measure whether a security is in a trend, and more specifically if the price is hitting new highs or lows over the calculation period typically The indicator can also be used to identify when a new trend is set to begin.

The Aroon indicator comprises two lines: an Aroon-up line and an Aroon-down line. When the Aroon-up crosses above the Aroon-down, that is the first sign of a possible trend change. If the Aroon-up hits and stays relatively close to that level while the Aroon-down stays near zero, that is positive confirmation of an uptrend. The reverse is also true. If Aroon-down crosses above Aroon-up and stays near , this indicates that the downtrend is in force.

The moving average convergence divergence MACD indicator helps traders see the trend direction, as well as the momentum of that trend. It also provide a number of trade signals. When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period.

Best technical indicators for stock trading pdf

The indicator is composed of two lines: the MACD line and a signal line, which moves slower. When MACD crosses below the signal line, it indicates that the price is falling. When the MACD line crosses above the signal line, the price is rising. Looking at which side of zero the indicator is on aids in determining which signals to follow. For example, if the indicator is above zero, watch for the MACD to cross above the signal line to buy.

The relative strength index RSI has at least three major uses. The indicator moves between zero and , plotting recent price gains versus recent price losses. The RSI levels therefore help in gauging momentum and trend strength. The most basic use of an RSI is as an overbought and oversold indicator.

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When RSI moves above 70, the asset is considered overbought and could decline. When the RSI is below 30, the asset is oversold and could rally. However, making this assumption is dangerous; therefore, some traders wait for the indicator to rise above 70 and then drop below before selling, or drop below 30 and then rise back above before buying. Divergence is another use of the RSI. When the indicator is moving in a different direction than the price, it shows that the current price trend is weakening and could soon reverse.

A third use for the RSI is support and resistance levels. During uptrends, a stock will often hold above the 30 level and frequently reach 70 or above. When a stock is in a downtrend, the RSI will typically hold below 70 and frequently reach 30 or below. The stochastic oscillator is an indicator that measures the current price relative to the price range over a number of periods. Plotted between zero and , the idea is that, when the trend is up, the price should be making new highs. In a downtrend, the price tends to makes new lows. The stochastic tracks whether this is happening.