W.D. Gann observed that over 90% of traders who enter the market without proper preparation or knowledge often face significant losses. One valuable tool in deciding whether to buy or sell is the use of Technical Indicators. These tools help predict stock market movements, increasing your chances of profit while reducing risk. Simply put, they are charts that show market patterns. When interpreted correctly, they can indicate whether market prices might go up or down, or if stocks are currently too high or too low. These charts are created by applying formulas to price details, with the most basic being price/volume indicators.
Technical Indicators provide new insights into an instrument’s price. Some, like Moving Averages, are simple to understand, while others, such as Stochastics, rely on more complicated formulas. When analyzing the stock market, it’s generally recommended to use two or three compatible indicators. Most brokerage firms offer charting tools for technical analysis. If you need help picking a broker or want more information on forex trading, resources are available.
There are two main types of Technical Indicators:
1. Leading Indicators: These track price movements and generate buy or sell signals. While they create more trading opportunities, they do come with risks. Common leading indicators include the Commodity Channel Index (CCI), Momentum, Relative Strength Index (RSI), Stochastic Oscillator, and Williams %R. They provide early warnings for entry or exit points but can sometimes give inaccurate signals, adding to trading risks.
2. Lagging Indicators: Also known as Trend Following Indicators, these follow price changes but act after the fact. Although their signals are slower and may add risk, they excel at capturing and maintaining a move for its duration. Examples include Moving Averages and MACD (Moving Average Convergence Divergence).
In summary, it’s crucial to maintain a balance when using Technical Indicators. While early-reacting indicators can provide timely market signals, they might also give false alarms, increasing risk. Therefore, it’s advised to use complementary indicators to mitigate these risks and lower your trading vulnerabilities.
Punit Gupta is an entrepreneur and full-time stock trader. He specializes in building startups and is currently developing a brokerage selection platform called Best Trading Brokerage. Punit studied at the Georgia Institute of Technology in Atlanta and previously worked with a startup for seven years before launching his own venture.