Technical Indicators: Definition
Technical indicators are mathematical representations of market patterns and behavior.
The indicators are formed by plugging information such as price and volume into a mathematical formula.
Overbought: A technical condition that occurs when there has been a lot of buying and the price of the stock is considered too high and susceptible to a decline.
Oversold: A technical condition that occurs when there has been a lot of selling and the price of the stock is considered too low and a rally in prices is anticipated.
Essentially traders use technical indicators for two things:
• To generate buy and sell signals
• To confirm price movement
Types of Indicators
There are two main types of indicators:
• A leading indicator precedes price movement, and is often used to generate buy and sell signals.
• Leading indicators are affected more heavily by recent price changes and tend to generate more signals and allow more opportunities to trade than lagging indicators.
• Since the indicators produce more buy and sell signals, they also produce more false signals.
• When leading indicators are right, they allow you to get into a trade early and make more money, but when they're wrong you tend to lose money because you're in and out of trades more frequently.
Some of the more common leading indicators are:
• Relative Strength Index (RSI)
• Parabolic SAR
• Williams %R
• A lagging indicator is a confirmation tool because it follows
• It happens "after the fact".
• Change of trend
Two of the more common lagging indicators are:
• Moving Averages
It's helpful to note that there are a few well-known ways to use the MACD:
Foremost is the watching for divergences or a crossover of the center line of the histogram; the MACD illustrates buy opportunities...