A:

The types of characteristics that make a good market indicator – such as ease of use, compatibility with other tools of technical analysis and adaptability – do not change based on the experience of the trader who interprets it. There are some examples of well-respected market indicators that may be difficult for novice traders to understand at first glance (bullish percent indexes, for example). By and large, the type of momentum analysis that most market indicators offer is the same for a trader with six months of experience as it is for a 20-year trader.

Market indicators are often confused with technical indicators. Traders and analysts use technical indicators to study and trade all types of instruments, including stocks, commodities, currencies and indexes. Market indicators are primarily used for major indexes, such as the S&P 500 and the New York Stock Exchange (NTSE), and most are measurements of volume and trend momentum.

The most basic and common market indicator is the advance-decline (A/D) line, which is a cumulative breadth index that charts the net difference between advancing stocks and declining stocks. There are several derivations of the A/D line, and many other types of technical tools use the A/D line for their calculations.

The McClellan oscillator and the McClellan summation index are very common market oscillators – indicators that plot their values on a range that fluctuate above and below zero. These are useful to identify overbought and oversold conditions.

The volatility index is a market sentiment indicator most commonly used for the Chicago Board Options Exchange (CBOE). Options traders rely on this market indicator to show extreme bullishness or bearishness and to forecast reversals.

Other very popular indicators include the absolute breadth index, the Arms index (TRIN), the high-low index and the net new highs indicator. Certain central tendencies exist among popular market indicators: sensitivity with the ability to be smoothed by other indicators, cumulative running totals of market breadth and a larger emphasis on the slope of the trendline than the specific value of any one data point.

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