The professional trader uses the best tools to gain knowledge of market changes. Technical analysis indicators will make this process easier.
Effective trading - best indicators of technical analysis
Billionaire Warren Buffett once famously said, "In the business world, the view in the rearview mirror is always clearer than the view through the windshield." This means that it is easier to look back and analyze what happened than to look ahead and try to see the future. But the task of a professional trader is to predict exactly how the market situation will change in the future because it is the correct forecast that can bring profit. Therefore, it is important to use the best technical analysis indicators to help make your trading more efficient.
A basic principle of technical analysis indicators
Indicators for trading are tools that professional clients actively use. Because they work well with popular strategies and analyses to provide additional data and help create a clearer picture of the market.
The main purpose of indicators is to generate trading signals that allow you to open a position to sell or buy an asset at the right time. The principle of operation of the technical analysis of the financial market and indicators is based on the study of price behavior in the past, so you can never be sure that the forecast is correct.
Experienced traders usually use two or three indicators in their work to confirm signals. It is permissible to use more but in this case the noise increases. It is also difficult to choose settings for a large group of indicators for one market situation and chart period, which is why many indicator strategies focus on only one indicator and certain settings.
It is important to understand that technical analysis indicators will not help you “see the future”. They allow you to see the main trends, assess their direction and strength. This will help you make the right decision in time.
Main groups of technical analysis trend indicators
In modern trading, there are a large number of different indicators available to the trader. For convenience, they are divided into four main groups.
• Volume indicators show the general market activity over a certain period.
• Trend indicators allow timely identification of an emerging trend and direction.
• Oscillators - basic technical analysis indicators that are used to determine trend reversal points to open trades in the opposite direction.
• Indicators based on moving averages - tools that display price changes over certain periods.
List of leading indicators in technical analysis
Of course, each trader chooses those indicators that are most convenient for him to work with. Here you can find out about the most popular and effective options.
Volume indicators: OBV and AD
OBV is one of the most popular representatives of this group of technical indicators. This tool shows the dynamics of changes in the price of an asset while informing about the number of trading operations for the selected period. If the volumes have seriously fallen or increased, and the market continues to stand still, you should expect a powerful trend to start.
Also, OBV shows in which direction the balance begins to shift - buyers or sellers. This indicator is used primarily for trend confirmation. If the OBV readings are in line with market highs, it means that the uptrend is strong enough. If the lows are confirmed, then the downtrend prevails.
Accumulation Distribution indicator
This tool was developed based on OBV and Accumulation/Distribution Index. It shows whether the current trend has sufficient support from the players. Also, the indicator generates quite strong divergence signals. Thus, the trader receives a message about the imminent trend change.
If AD rises simultaneously with the price chart, it is worth buying an Up option. When both curves are decreasing together, the Down option is purchased. If the price is rising and the indicator is declining, then the uptrend is nearing completion. At this point, it is worth buying an option with a decline forecast. If the situation is mirrored, an option with a growth forecast is purchased.
The disadvantage is that this indicator includes ignoring price gaps, which leads to errors in calculations. Besides, it repeats price movements too closely, which may result in the omission of some divergences. Otherwise, it is a very effective auxiliary analysis tool.
Money Flow Index or MFI
This index shows how much money investors put in security or how quickly they withdraw money. A positive cash flow leads to an increase in prices, a negative one - to a fall. Evaluating flows allows you to determine the strength and direction of the future trend. MFI cash flow is calculated as the product of the average price of the high, low, and close by the trading volume for the period. The index itself is the quotient of the sum of positive and the sum of negative flows. For convenience, it is reduced to values from 0 to 100.
The index shows divergence, as well as overbought and oversold zones. The investor makes decisions based on overbought levels. If the price exceeds the upper level, the market has a positive cash flow, you need to buy. If the price falls below the lower level, vice versa.
One of the leading indicators of technical analysis in trading today. When prices fluctuate upward or downward, their movement can be misinterpreted as a reversal or trend continuation. The MA ("Moving Average") indicator calculates the average price over some time and also recalculates it over time.
Short periods have little effect on the MA indicator, which relies on long periods. By looking at the MA chart, you can identify support and resistance levels. Support is a lower “barrier” that the price will most likely not jump over. The resistance level is the opposite of the support level - it is also a kind of barrier above the current price level, which is unlikely to be overcome with confidence. Thus, the MA indicator makes it easy to see support and resistance levels.
Another popular trading indicator. This tool is based on the Simple Moving Average (SMA). Two similar SMAs, shifted by the standard deviation, are positioned above and below, thus forming a corridor within which the price moves most of the time. A narrowing of the channel indicates a decrease in the volatility of an asset, an expansion - an increase.
Breakout trading involves opening trades at the moment the price crosses one of the boundaries. If the upper limit is overcome, PUT is bought, if the lower one is CALL. Since breakouts can occur quite often, you should only react to signals if the price has broken the border, coming from the opposite or at least the central line.
Remember that effective trading is impossible without a professional approach. Even the most advanced indicators cannot make the right decision for you. Only experienced, the ability to analyze the market, and an understanding of its dynamics will help you become a real professional and make a good profit.