Technical Indicators - 4 Basic Groups

Technical indicators help understanding trends and behaviors of the financial markets. When considering technical analysis, it is important to understand that indicators are using mathematical formulas and a set of calculated past data (usually price).

Types of Technical Indicators

Although there are thousands of commercial and custom technical indicators, the technical analyst can divide all of them to just four major groups, as follows:

Momentum - Strength Indicators

Momentum indicators are a general term used to describe the speed at which price moves over a given period of time. As traders, we add these indicators to our chart analysis to tell us if a currency or a market has risen to its overbought zone, or fallen to its oversold zone.

Divergence: when price and the corresponding momentum or strength indicator move in opposite directions (trend line), the price, most of the time will follow the direction of the indicator.

Best momentum indicators – Commodity Channel Index (CCI), Chande's Momentum Oscillator (CMO), Momentum Indicator, Relative Strength Index (RSI), Stochastic Oscillator.

Volatility - Bands Indicators

Volatility indicators are a general term used to describe the magnitude of day-to-day fluctuations in prices. When applying volatility or bands indicators to price chart, the technical trader can see how active a market is as reflected by the size of price ranges without specifying a price direction. Often, changes in volatility tend to lead to changes in price.

Best volatility indicators – Average True Range (ATR), Bollinger Bands (BB), Projection Oscillator, Trading Bands (Envelope), Volatility Chaikin's.

Trend - Directional Indicators

Directional or trend indicators attempt to provide an objective measure of the direction of the trend, in spite of that, they are quite subjective and depend on the eye of the beholder.

These indicators use very standard statistical methods such as moving averages or the linear regression indicator which quantifies the data to smooth fluctuations and present an overall view of the price direction.

Best trend indicators – Forecast Oscillator, Linear regression, MACD (Moving Average Convergence/Divergence), Moving Average Indicator, Parabolic SAR.

Volume Indicators

Volume indicators are used to confirm the trend and the buying or selling pressure in that trend direction. As volume increases, prices usually also increase, so, the absence of confirmation from volume related indicator may warn of a reversal.

Best volume indicators – Chaikin Money Flow, Demand Index, Ease of Movement, On Balance Volume (OBV), Volume Rate-of-Change (ROC).