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With a view to understanding the Technical Indicators, first, we have to understand what is technical analysis. There is a technical analysis and its tools used by economists for the economy and another is technical analysis and its tools for the financial markets used by traders.
What is Technical Analysis for Economy?
Technical analysis is a method for forecasting the direction or trend in the economy by using statistical data. This data helps to determine the trend in the economy. Mainly, for developing countries like India, these speculations help to grab loans and foreign investments from the international players for infrastructure development and other related developments for the country, as growth indicators attract investors to invest. It falls in the category of behavioral economics, which uses some similar tools of technical analysis used in the financial markets for stock and commodity price and trade-volume changes.
There Are 3 Types Of Macroeconomic Indicators
1) Leading Indicators
2) Lagging Indicators
3) Coincident Indicators
These three indicators are broad and used by economists for economic forecasts. Stock market indicators fall in these categories but some are completely different statistical calculations and some are similar. So we will be understanding these indicators by understanding economic aspects together.
1) Leading indicators
These types of indicators are considered to point toward future events. Simply, they provide signals of upcoming trends. These indicators are for economists and investors who hope to anticipate trends. Bond yields, for example, are thought to be a good leading indicator of the stock market as bond traders anticipate and speculate about trends in the economy that whether inflation will arise or not, or is there a high money flow in the market or not. To understand the bond market - RBI's G-SAP.
The Overall money supply, which is controlled by the central bank of a nation, is also a significant leading indicator. If there is plenty of money out there in the market, in people's pockets, and in bank accounts ready to be invested, it is a signal that the economy can be strong. But yes, not until the money is expended and invested. The economy needs to have a balanced money supply in the market. A high number of money savers together do not help the economy to grow.
2) Lagging Indicators
These indicators follow the price action; meaning the data can only be identified after the event. These indicators help to clear and confirm a pattern that is happening over time. For instance, the unemployment rate. If the rate had risen for the two consecutive months, it indicates that the economy is not performing well and it may continue to perform poorly, simply, indicating a weak trend.
Another example we have is Consumer Price Index or CPI, which indicates changes in the inflation rate. There are other few events as well that cause more economic ripple effects. Both the overall numbers and prices in key industries like fuel costs, industrial production, and subsequently GDP growth rate are examples.
3) Coincident Indicators
Coincident indicators are macroeconomic measures that are as reflective as possible of the current situation. Simply, these types of indicators are analyzed as they occur. Coincident indicators are used in connection with leading and lagging indicators to get insights into where the economy has been and how it is expected to change in the future. There are key statistics that have a substantial effect on the economy. For example, per capita income or personal income. Higher per capita income coincides with a stronger economy, whereas lower indicates a weak economy.
What is Technical Analysis for Stock Market?
Technical analysis is basically a trading method for the evaluation of stocks in order to identify trading opportunities. By analyzing statistical trends gathered from past performances of price movements and trade volume, as well as future trends, the technical analysis predicts and helps to set the near future targets. In other words, in the financial markets, technical analysis is a method for forecasting the direction or trend of prices and trade volume.
What are Technical Indicators for Stock Market?
Indicators are mathematical calculations that can be applied to a stock's past patterns, like price, buying-selling volume, and even to the other technical indicators. Technical indicators, however, do not analyze any part of the business such as revenues, profits, debt, and company management. But it is seen that through understanding a few, people can earn quick money in the stock market.
The Purpose
Planning investments for the long-term have always worked for those who hold shares. But when an individual is planning for a short-term investment, like for a month, or a week, or a day, technical indicators for the stock market are the best for the time being. Additionally, an individual who wants to know current sentiments, or simply, what others are doing and what drives the thinking of other market participants. Understanding technical analysis and indicators this way is very important.
Technical indicators provide insights that are used to,
• ALERT traders about trade,
• PREDICT the direction of future prices,
• CONFIRM technical insights suggested by other indicators.
Two Categories of Technical Indicators Used in Stock Trading
In the stock market, technical indicators form in two categories.
1. Leading indicators (Oscillators)
2. Lagging Indicators (Overlay or Trend-Following)
Types of Technical Indicators
(1) Trend Indicators
These types of indicators measure the direction and strength of a trend, using some form of price averaging to establish a baseline. As price moves above the average, one can speculate of a bullish trend. When prices fall below the average, it signals a bearish trend. We discuss three types of Trend Indicators:
(i) Moving Averages: Lagging
- Used to identify current trend and trend reversals, as well as to set up support and resistance levels
(ii) Moving Average Convergence Divergence (MACD): Lagging
- Used to reveal changes in the strength direction, momentum, and duration of a trend in a stock's price
(iii) Parabolic Stop and Reverse (Parabolic Sar): Leading
- Used to find a potential reversal in the market
(2) Momentum Indicators
These types of indicators help to identify the speed of price movement by comparing prices over time. It can also be used to analyze volume. It is calculated by comparing the current closing price to the previous closing prices. Typically, this appears as a line below a price chart that oscillates as a momentum indicator, it can signal a change in future prices. We discuss three types of Momentum Indicators:
(i) Stochastic Oscillator: Leading
- Used to predict price turning points by comparing the closing price to its price range
(ii) Commodity Channel Index (CCI): Leading
- An oscillator to help identify price reversals, price extremes, and trend strength
(iii) Relative Strength Index (RSI): Leading
- It measures the stock's recent trading strength, the velocity of a change in the trend, and the magnitude of the move
(3) Volatility Indicators
These types of indicators measure the rate of price movements, regardless of direction. This is generally based on a change in the highest and lowest historical prices. They provide useful information about the range of buying and selling that takes place in the market and help traders determine points where the market may change direction. We discuss three types of Volatility Indicators:
(i) Bollinger Bands: Lagging
- Used to measure the HIGHEST or LOWEST of the price, relative to previous trades
(ii) Average True Range: Lagging
- This indicator does not provide an indication of price trend, but simply the degree of price volatility
(iii) Standard Deviation: Lagging
- Used to find out expected risk and determine the significance of certain price movements
(4) Volume Indicators
These types of indicators measure the strength of a trend or confirm a trading direction based on some form of averaging or smoothing of raw volume. The strongest trends often occur while volume increases. In fact, it is the increase in trading volume that can lead to large movements in price. We discuss three types of Volume Indicators:
(i) Chaikin Oscillator: Leading
- Monitors the flow of money in and out of the market, comparing money flow to price action helps to identify tops and bottoms in short and intermediate cycles
(ii) On-Balance-Volume (OBV): Leading
- On-balance volume measures the level of accumulation or distribution by comparing volume to price movement
(iii) Volume Rate of Change:Lagging
- Highlights increases in volume, which normally occur at most significant market tops, bottoms, and breakouts
Apart from these indicators, there are many more indicators used by professionals traders and economists according to their analytical preferences. Indicators used by economists are more reliable for economic forecasts, which somehow affects the stock market in the medium term. However, it does not have a direct connection to the performance of businesses. But poor business performances across a country indicate that the economy is performing poorly.
Usage of the Technical Indicators in The Stock Market
- Technical indicators of the stock market are most extensively used by stock traders daily, as they are primarily designed for analyzing short-term price movements. To a long-term investor, most technical indicators are of little use
- Technical indicators are used by stock market traders to gain insights into the supply and demand of securities and market sentiment
- Covering more than five indicators is ineffective and does not help to speculate properly. Therefore, it is better to use two to three indicators by learning their complexities
- It is better to use indicators that complement each other, meaning never choosing those that generate the same signals
- It is better to substantiate the trend and strategy given by other indicators by using confirmation indicators
- Understanding indicators completely is very important to differentiate them. It helps to decide between two or more giving similar insights
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