A:

Technical analysis uses statistics related to market activity, such as past prices and the volume of shares traded, to identify patterns that may suggest future share price. It is different from fundamental analysis in that it does not involve determining a stock’s intrinsic value, but is similar in that both valuation methodologies seek to identify stocks that are either overvalued or undervalued.

Investors can use several different indicators to determine if a stock is undervalued. Technical investors will look at these indicators in chart form when evaluating shares.

On-Balance Volume (OBV)

Combines volume and price movement to show the flow of volume relative to price over time. If changes in volume precede changes in price, an increase in trade volume could indicate that a stock is shifting away from being undervalued.

Accumulation/Distribution (A/D) Line

Looks at the closing price and trading period for a stock over a period of time, and is designed to give a picture of money flow. An upward trend shows increasing buying. Even if the price of a stock is moving sideways, an increasing A/D line shows that the stock was being accumulated.

Average Directional Index (ADX)

Measures the strength and momentum of a trend. Because ADX is non-directional it doesn’t show the direction of the trend, which is why investors typically plot two other indicators alongside ADX. Values above 20 indicate that a trend is increasing, while a value of 40 indicates that a trend is exhausted and may reverse.

Aroon Indicator

Used to determine whether a stock is in a trend, and how significant that trend is. There are two indicator lines – one bullish and one bearish – though they can be combined into one value for simplicity. When using a single oscillator, the higher the number, the more bullish the predictor. An investor may consider an increasing Aroon indicator value a sign that a stock is potentially undervalued.

Moving Average Convergence Divergence (MACD)

This indicator is comprised of two exponential moving averages, and is designed to signal the trend and momentum behind a stock. It measures short-term momentum versus long-term momentum by taking the difference between the moving averages for both terms.

Relative Strength Index (RSI)

This indicator is used to signal overbought and oversold conditions for a stock. Low values suggest that the stock is oversold.

Stochastic Oscillator

Shows whether a trend is closing in on highs or lows of a trading range, with oversold conditions below a value of 20 and overbought conditions above 80.

RELATED FAQS
  1. Does a strong trend (ADX > = 40) cause an increase in volatility?

    In technical analysis, there have been numerous indicators invented for identifying trends. One of the most common of these ... Read Answer >>
  2. How do technical analysts interpret the Average Directional Index (ADI)?

    Learn what the average directional index is and why technical analysts look towards ADX indicators to measure the strength ... Read Answer >>
  3. What are the best technical indicators to complement the Moving Average (MA)?

    Learn about some of the common confirmation tools and techniques that traders and analysts use in conjunction with moving ... Read Answer >>
  4. What is a common strategy traders implement when using the Money Flow indicator?

    Learn a common trading strategy traders implement with the money flow indicator to identify profitable trade entry and exit ... Read Answer >>
  5. What are the best indicators to identify overbought and oversold stocks?

    Learn about the interpretation of the relative strength index and stochastics, two of the most popular indicators of overbought ... Read Answer >>
  6. What precisely is a stochastic oscillator meant to predict?

    Gain a basic understanding of the stochastic oscillator and how this technical indicator is designed to predict reversals ... Read Answer >>
Related Articles
  1. Trading

    Top 7 Technical Analysis Tools

    Technical indicators determine the direction of an asset’s momentum and whether that direction will continue. Here are seven used most.
  2. Trading

    3 Technical Tools To Improve Your Trading

    Find out how volume, the Aroon indicator and Fibonacci numbers can improve your profits.
  3. Trading

    Use The Momentum Strategy To Your Advantage

    Learn how to use a number of different indicators to know when to make your trading moves.
  4. Trading

    Finding The Trend With Aroon

    Don't be confused about whether a long-term trend will continue, stall or reverse.
  5. Trading

    Exploring Oscillators and Indicators: Average Directional Index

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The average directional index (ADX) is a trend indicator used to measure the strength and momentum of an existing trend. ...
  6. Trading

    Exploring Oscillators and Indicators: Conclusion

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The goal of every short-term trader is to determine the direction of a given asset's momentum and to attempt to profit from ...
  7. Managing Wealth

    The Top Technical Indicators For Commodities Investing

    Traders can use "the usual suspects" (standard indicators for trend trading) when it comes to choosing indicators for investing in commodities. Here's how.
  8. Trading

    The Four Most Common Indicators in Trend Trading

    Here are the top indicators and tools trend traders use to establish when trends exist and find entry/exit points.
  9. Trading

    ADX: The Trend Strength Indicator

    Follow this tool to reduced risk and increase profit potential.
  10. Trading

    Finding Market Movement With The ADX

    Take a closer look at this indicator, which refines your insight into the strength of a prevailing trend.
RELATED TERMS
  1. Ease Of Movement

    A technical momentum indicator that is used to illustrate the ...
  2. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  3. Accumulation/Distribution

    An indicator that tracks the relationship between volume and ...
  4. Undervalued

    A financial security or other type of investment that is selling ...
  5. Cumulative Volume Index - CVI

    A momentum indicator that gauges the movement of funds into and ...
  6. Average Directional Index - ADX

    An indicator used in technical analysis as an objective value ...
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center