Wondering if there could be technical indicators worth paying attention to for insight into market behavior? Continue reading to explore the Top 10 Powerful Trading Indicators.
In this article, we will be emphasizing trading indicators which will enlighten you on why every trading indicator is the secret ingredient to profitable trading.
Table of Contents
- What Is Trading Indicator?
- Moving Average (MA) Trading Indicator
- Exponential Moving Average (EMA) Trading Indicators
- Stochastic Oscillator Trading Indicators
- Moving Average Convergence Divergence (MACD)
- Bollinger Bands Trading Indicators
- Fibonacci Retracement Trading Indicators
- Relative Strength Index Trading Indicators
- Ichimoku Cloud Trading Indicators
- Standard Deviation Trading Indicators
- Average Directional Index Trading Indicators
What Is Trading Indicator?
As we all know, trading indicators are mathematical calculations, which are plotted as lines on a price chart and can help traders or investors to identify certain signals and trends within the market.
…10 Best trading indicators.
1. Moving average (MA)
2. Exponential moving average (EMA)
3. Stochastic oscillator
4. Moving average convergence divergence (MACD)
5. Bollinger bands
6. Fibonacci retracement
7. Relative strength index (RSI)
8. Ichimoku cloud
9. Standard deviation
10. Average directional index
Using trading indicators is part of any technical trader’s strategy. Paired with the right risk management tools, it could help you gain more insight into price trends, potential reversals, and continuation. It is considered to be a cryptocurrency or Forex investor’s vital tool for good decision making.
Moving Average (MA) Trading Indicator
Moving averages is a Trading Indicators, A technical analysis tool used to calculate or identify the direction of a stock/commodity or determine its area of support and resistance levels.
This is generally considered as a trend following indicator or lagging indicator based on past prices, Moving averages are totally customizable which implies that an investor or trader can freely choose whatever time frame they desire when calculating an average.
The most common time period used in moving averages is 15, 20, 30, 50, 100, and 200 days. However the shorter the time span used to calculate or create an average the more sensitive it will be to price fluctuation and the longer the time span, the less sensitive to price fluctuation.
A rising moving average indicates that a commodity or security is in an uptrend, while a declining moving average indicates that the commodity or security is in a downtrend. Moreover, upward momentum is confined when a short-term moving average crosses above a longer-term moving average in a downtrend.
Conversely, downtrend momentum is confined when a short-term moving average crosses below a longer-term moving average in an uptrend.
Exponential Moving Average (EMA) Trading Indicators
These moving averages are Trading Indicators one of the oldest and most used trading indicators, Traders and Investors incorporate this indicator into chats to help them determine trend direction and relative strength of a security or commodity.
The Exponential moving average (EMA) is similar to a simple moving average (SMA) tho it measures a trend direction of a period of its unique calculations, Exponential moving averages (EMA) follow market prices more closely. Exponential moving averages are basically used to determine trend direction.
EMA’s tends to support the price action while a falling EMA tends to provide resistance to price action. This reinforces the strategy of investors or retail traders to buy(go long) when the price is near the rising Exponential moving averages in a downtrend and thus prompting them to sell (go Short) when the price is near the falling EMA in a downtrend.
Stochastic Oscillator Trading Indicators
This is basically a technical analysis tool used in commodity or security trading, The stochastic oscillator is a momentum trading indicator that uses support and resistance levels. It in terms refers to the point of a current price in relation to its price range over a predetermined period of time.
stochastic oscillator is a range-bound tool, Meaning that it has a reading of between 0 and 100. This makes it unique as a useful indicator for overbought and oversold conditions, Reading over 80 are considered to be in the overbought range by investor and traders while reading under 20 is considered oversold.
However stochastic indicator sating generally consists of two major lines, One reflecting the actual value of the oscillator and the other reflecting its three-day Simple moving average, the intersection of these two lines is considered by investors and traders that a reversal might be in play and it is mostly used in our technical analysis.
It indicates a large shift in momentum and investors’ perspective, More often than not divergence between the stochastic oscillator and trending price action is also speculated as a potential reversal signal.
Moving Average Convergence Divergence (MACD)
The moving average convergence divergence indicator is primarily a momentum oscillator used to identify or trade potential trends. It is not typically used to identify overbought and oversold conditions in prices, It shows the relationship between two moving averages of a commodity or stock price.
Moving averages convergence divergence is a stock or commodity indicator primarily used in technical analysis, Investors and traders consider MACD bullish when the lines cross above the signal line from below and further below the zero lines the stronger the bullish it may be.
MACD crossing below the signal lines is basically considered to be bearish and prompts investors to sell(go short). However divergence between the MACD and the price action is considered a stronger signal when confirmed by crossover.
Bollinger Bands Trading Indicators
Bollinger bands are a technical analysis tool developed by john Bollinger, It is primarily used for trading stocks, commodities, securities, and more. The bands comprise a volatility indicator that measures relatively the highs or lows of commodity prices in relation to previous trades. Using standard deviation volatility is measured therefore changes with increases or decreases in volatility.
Its band expands when there is relatively a price increase and compresses as price decreases. Bollinger bands are applied to a variety of trading securities due to their dynamic nature. However, it is basically comprised of three lines, The Upper, Middle, and lower bands. The upper and lower bands are positioned on either side while the middle is a moving average whose parameters are determined by the trader or investor.
The position of these bands provides information on how strong the trend is and how also detecting potentials of high and lows price levels may be expected in the immediate future. Moreover, Bollinger bands can also be used to know how strong an asset is increasing and when it is likely to lose strength and reverse/change direction.
Fibonacci Retracement Trading Indicators
In finance Fibonacci retracement as the name implies is a technical tool used by technical investors/analysts for determining the support and resistance levels of a commodity. It uses a Fibonacci sequence of numbers whose ratio provides potential price levels to which markets tend to retrace after a portion of a move before the trend continues in its original direction, this could be an uptrend or a downtrend.
A Fibonacci retracement forecast is created by picking extreme points, Peak formation high(PFH), and Peak formation low(PFL) on a chat thus dividing the vertical distance by the Fibonacci ratio. In Fibonacci retracement, 0% is considered to be the start of the resistance, while 100% is a complete reversal of the initial price before the move.
Horizontal lines are drawn in the chats for these price levels to identify common support levels, the common Fibonacci levels are 23.6%, 38.2%, 50%, and 61.8%. Additionally, the Fibonacci retracement tool is mostly used by investors /technical traders which help them identify strategic places/price levels for transaction, stop losses, and target prices.
However, the retracement levels do not change which helps investors and traders in easy identification of price levels. Investors anticipate some price rejection or breaks at Fibonacci retracement price levels.
Relative Strength Index Trading Indicators
The relative strength index is a technical Trading indicator majorly used in financial markets analysis. It is incorporated into the chart to measure the current and historical strength or weakness of a stock market or commodity based on the closing prices of recent trading periods.
RSI is displayed as an oscillator (a line graph that moves between two extreme points ), RSI has a reading of 0-100. Generally, if the RSI surpasses the horizontal 30 reference level, it indicates a bullish sign and a bearish sign when it slides below the horizontal 70 reference level.
The RSI is mostly used in a 14-day time frame. Additionally in an uptrend or bull market, the RSI tends to remain in the 40 – 90 range with the 40 – 50 level acting as support. Moreover, during a downtrend or bearish market, the RSI tends to stay between the 10 – 60 range with the 50 – 60 level acting as resistance.
Ranges of the RSI vary depending on the configuration of the investor or trader. The relative strength index provides signals that prompt investors and speculators to go long(BUY) when the security/Commodity is oversold and to short(SELL) when it is overbought.
Ichimoku Cloud Trading Indicators
The Ichimoku cloud is an oscillator of technical analysis that shows support and resistance levels as well as momentum and trend direction. Ichimoku takes multiple averages, therefore, plotting them on a chart, it makes use of these figures to complete a “cloud” which attempts to forecast where the price may find support or resistance.
The Ichimoku cloud is basically comprised of five major lines or calculations, two of which comprise a cloud where the difference between the two trend line is shaded in.
The conversion line(Tekan – San) is perceived to be the short-term line and it represents the average of the high and low for the period(9 – period high + 9 periods low / 2).
The baseline (Kijon – San), This is the long-term line and it’s calculated as the average of the high and low for the 26 – period (26 – period high + 26 – period low / 2).
The lagging span (Chickou span), A lagging line that represents the closing price for the previous 26 periods. The lines enable investors to easily compare the current price movement with the movement from 26 periods past.
The leading span A(Senkou Span), is utilized as a leading indicator defined for future 26 periods. the values for this indicator are obtained as the middle point of tenkan-san and kijun-san based on the past last 26 periods (conversion line + Baseline) / 2 ).
The leading Span B(Senkou Span B), is used as a leading indicator since it is calculated for 26 periods ahead based on the average of the 52 periods high and 52 -periods low (52 -periods high – 52 periods low / 2 ).
The Ichimoku cloud(Kumo) has highly notable features presented on the chart and the area between the leading span A and the leading span B lines. it is a key part of the technical indicator, whenever the price is below the cloud, the trend tends to be down and when the price is above the cloud trend tends to be up.
It additionally is used by investors or traders because it provides a certain estimation about future price levels and can be incorporated as a trading strategy to determine trend direction, support & resistance levels, and also determine crossovers.
Standard Deviation Trading Indicators
The standard deviation is a statistical term that refers basically to the volatility of price in currency pairs. it is used as a Trading Indicators, It, therefore, measures how widely values are dispersed from the mean or average, Dispersion is basically the effective difference between the actual closing value price and the average closing value.
Standard deviation is the square root of the variance and the average of the squared deviation derived from the mean. A high standard deviation is present when the price of a studied currency volatility changes and has large daily ranges, However, low structured deviation values take place when currencies are trading on a range or consolidation.
This implies that prices are more stable and less volatile. Major tops and bottoms are important/ Vital changes that are accompanied by high volatility as prices reflect the psychology of market participants as well as fundamentals.
The standard deviation can be used in two different ways:
- The higher the value of the indicator, the wider the spread between prices and basically its moving averages. The more volatile the instrument and the more dispersed the price bar will become.
- The lower the value of the indicator, the smaller the spread between the prices becomes with its moving averages, the lower volatile the instrument and the closer to each other the price bars become.
Average Directional Index Trading Indicators
The average directional index(ADX) is a Trading Indicator used by the majority of traders or investors to determine the strength of a trend. The trend can either be an up trend, a downtrend, else a ranging market that is a result of low volatility.
Determining the strength of a trend using two indicators, The negative direction indicator(-Di) and the positive direction indicator(+DI). ADX makes use of three separate lines to help in assessing whether a trade should be taking long or short, or can even be avoided.
ADX indicator is expected to be above 25 when the trend is strong and 20 if the price is trend less or weak according to
All of these Trading Indicators have their place and can help in identifying what the price of an asset will do. For instance, Moving Average (MA) is an indicator used to identify the direction of a current price trend, without the interference of shorter-term price spikes;
A stochastic oscillator is an indicator that compares a specific closing price of an asset to a range of its prices over time; MACD is an indicator that detects changes in momentum by comparing two moving averages, and a Bollinger band is an indicator that provides a range within which the price of an asset typically trades.
You can use your knowledge and risk appetite as a measure to decide which of these trading indicators best suit your trading strategy.
Note that the indicators are some of the most popular choices for retail traders and investors. Whether you’re interested in Forex Trading, Commodities Trading, Stock Trading, or Crypto Currency Trading, it can be helpful to use a technical analysis tool as part of your strategy.
What are your thoughts on the Top 10 Powerful Trading Indicators? Is it a useful tool, or is it a waste of time? Let us know by commenting on this post, and be sure to check back in the near future for more trading-related content.
“Chinedu is a Trader and content writer, With a passion for educating others about the financial markets. Through his writing, he works tirelessly to share insights and knowledge gained from years of experience trading in the financial market. He is dedicated to helping others achieve success in their journey by providing valuable information on what works and what doesn’t.