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 it. There have been hundreds of technical indicators and oscillators developed for this specific purpose and this tutorial has just covered the tip of the iceberg.
Here is a brief summary of what we've covered:
- Technical indicators are calculations based on the past price and volume of a security in an attempt to measure factors such as money flow, trends, volatility and momentum.
- Indicators can be separated into two main types - leading and lagging.
- Leading indicators are those created to proceed the price movements of a security giving predictive qualities.
- A lagging indicator is one that follows price movements and is often used to confirm a predicted move.
- Transaction signals can be generated in several different ways, but the two most popular methods are by using crossovers or divergence.
- A crossover occurs when the indicator moves through an important level or a moving average of the indicator. It is used to signal a shifting trend or momentum.
- Divergence occurs when the direction of the price and the indicator are moving in opposite direction. Generally, the price of an asset will revert back so that it trades in the same direction as the indicator.
- Volume can often be used to predict future price movements. One of the most popular indicators for this purpose is known as on-balance volume (OBV).
- Trending indicators, such as the Aroon indicator and the average directional index, are favorites amongst traders who wish to determine the strength of a given trend and the likelihood that it will continue.
- The moving average convergence divergence (MACD) indicator is one of the most popular indicators and can signal the trend and momentum behind a given security.
- The relative strength index (RSI) is the most popular indicator used to determine overbought and oversold conditions.
- The idea behind the stochastic oscillator is that the closing prices should predominantly close in the same direction as the prevailing trend.
- Market indicators, such as the volatility indexes (VIX), advance-decline line, Arms index and McClellan oscillator are popular tools used by traders who wish to gauge the direction of the entire market to ensure that market forces are working in their favor.
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