Learn the Stock Market Lesson – Types of Technical Indicators

You can argue about trends but technical indicators are objective. Indicators are derived from prices and the more complicated they are, the more they deviate from prices and reality. Therefore, using simple indicators work the best.

The good technical indicators are immune to parameter changes and give useful signals at a broad range of settings. This means that if an indicator you are using gives great signals on a 20-day window for a certain stock but bad ones when you switch to a 15-day window, then the indicator is not too reliable.

Technical indicators can be divided into three major groups:

1)      Trend-following- These indicators include moving averages, MACD (moving average convergence-divergence), Directional System, among others. These indicators help us stay long in uptrends and short in downtrends.

2)      Oscillators – These indicators include Stochastic, Rate of Change, and many more. Oscillators help us identify turning points, or reversals, by displaying when markets are overbought (too high and about to fall) or oversold (too low and about to rise). They work great in trading ranges, catching upturns and downturns. The disadvantage is that they can give premature buy signals in downtrends and sell signals in uptrends.

3)      Miscellaneous Indicators – These indicators include Bullish Consensus, Commitments of Traders, and New High-New Lower Index, which measure the current mood of the market.

The tricky part is that indicators from different groups often contradict one another. For example, when markets decline, trend-following indicators turn down, signaling us to sell but at the same time, oscillators can become oversold and signal us to buy.

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This entry was posted on Sunday, August 9th, 2009 at 8:30 pm and is filed under Learn The Stock Market, Technical Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.