Technical Indicators for Profitable Trading

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Understanding Stock Trading

People make efforts on how to understand stock trading. Different keys are related to stock trading for eg technical indicators. Technical indicators can be very confusing and daunting for beginner traders. A lot of traders overload the charts with indicators as an excuse to over trade. Remember, indicators are an indication of something happening in the market. They aren’t a crystal ball trying to predict the future. Don’t blame the indicators when a trade doesn’t work out no matter which indicators you use you will still need to take losses in trading.

Technical Indicators

The two types of indicators. There are two main types of markets trending and range bound or sideways markets. A trending market looks like this where the market is moving in one direction, a range bound or sideways market looks like this, where the market is moving up and down within a specific range indicators tend to be suited to either trending or range bound in sideways markets. Indicator one: RSI the Relative Strength Index compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of instrument.

As you can see from the chart, the RSI ranges from 0 to 100. An instrument is deemed to be overboard once the RSI approaches a 70 level meaning that it may be getting overvalued and is a good candidate for a pullback or reversal. Likewise, if the RSI approaches 30 is an indication the instrument may be getting oversold and therefore likely to reverse. Traders will often use the RSI either coming back out to its overbought or oversold areas as a signal or partial signal to enter a trade. As we can see, the RSI is often accurate when indicating when a market will reverse.

A trader using RSI should be aware that large rallies and drops in the price of an instrument will affect the RSI by potentially creating false buy or sell signals. Traders often combine the RSI with other indicator signals such as MACD crosses. Indicator 2: MACD. The Moving Average Convergence / Divergence is one of the most well known and used indicators in technical analysis. This indicator is made up of two exponential moving averages which help measure momentum and an instrument. These moving averages and the changing distances between them become the MACD.

Convergence and Divergence

Convergence simply means the moving averages are moving close together, and divergence simply means they’re moving away from one another. When the shorter-term moving average is above the longer-term moving average this area of the indicator will show activity when the shorter-term moving average is below the longer-term moving average, this area of the indicator will show activity. The centre line, of which the MACD is plotted around, indicates where the moving averages are equal and when the MACD passes through the centre line this indicates the moving average is crossing.

The signal line, here in red, is a moving average of the MACD values themselves. Typical values for the MACD are 26 and 12 exponential moving averages, and 9 for the signal line. The farther apart the moving averages and the greater the momentum, the farther away the MACD will be from the centre line. Traders use the MACD and signal line crosses, such as these, to indicate momentum trades. You can see how these crosses often match up with market moves.

Traders also use the MACD crosses to indicate where momentum is coming out of the market and may use it is a signal to exit a trade. Indicator 3: Bollinger Bands. A Bollinger Band starts off a simple moving average it then has two standard deviations plotted away from it. Now sounds a mouthful, but the important part is because standard deviation is a measure of volatility, Bollinger Bands adjust themselves to current market conditions. When the markets become more volatile, the bands widen and move further away from the average. During less volatile periods the bands contract, moving closer to the average. The tightening of the bands is often used by technical traders as a early indication that volatility is about to rapidly increase as volatility often follows periods of lack of volatility. The market spent most of the time within the bands and when the price action reaches the edge of the bands, it is often more likely to reverse and come back into the range.

Using it for Benefits

This is used as a signal by reversal traders to take a trade. This is similar to the oversold and overbought conditions of the RSI. Indicator four: Super Trend Indicator. The super trend indicator is an excellent indicator of trend direction. It can be used as a foundation of a trading system that is based on trend following. One of the most popular ways to use this indicator is to enter the market after a pullback. For example, if the market is on a downtrend, indicated by red, wait for a green pullback and then re-enter the market once it turns red again.

The same can apply in up trending markets. Here we can see how this indicator accurately tracks market trends. It can be refined through the settings to match the specific instrument. Indicator 5: Confluence. The last indicator isn’t a new one it’s indicated confluence, which means to use multiple indicators and their signals to take a trade. Here we have the RSI and MACD we looked at with the RSI moving into overbought territory here. Remember, that indicates the market will reverse. However, we want to help us filter out false signals on the RSI so we also look at the MACD to give us confluence.

We can see is indicating the momentum has come out of the market as far as the market rallying or going up is concerned. And we have an MACD cross here. A signal to enter this short trade could be waiting for the RSI sights come back out of the over bought, and also waiting for the MACD cross. We can see that those combined signals or an indication that captures this trend.

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