In contrast to a popular image of a stockbroker as a luck chaser, stock trading is an art that requires skills in mathematics and analysis. Selecting the potentially promising stocks, predicting the price fluctuations, and selling or buying before the desired price movement happens – it all relies on careful observations and calculations. So when you enter the trading world and open an account on a trading platform, be ready to encounter an array of indicators, charts, indices, and -what’s not .
They are not used to confuse you – on the contrary, they are there to help you become an efficient trader without spending years on extensive theory learning. With a bit of desire and perseverance, you will master these indices and indicators quite fast and will use them to your benefit like a pro. And today, we will briefly focus on the first important element of technical analysis, namely, on stock indicators.
Stock indicators are analytical tools that help predict the direction in which prices of stock will move. Yes, by looking at the current levels and price movements, it is possible to define accurately what the price will be in the future. That’s why you need to know how to use these tools.
To lead or to follow?
Interestingly, to provide you with correct insights, indicators may reflect the price changes to come or the changes that were taking place over time. Indicators that give insights into the short-term future trends are leading indicators. They lead you through the next best price fluctuation.
Indicators that reflect and summarize the past price changes are lagging indicators. Why do you need them? Because by outlining the tendency for the past few months (or even years), they prompt you the next big long-term trend that will lead the market.
Key stock indicators
What stock indicator(s) should you use? It depends on your goals and personal preferences, but the main secret is to use up to 5 indicators. A larger number will just confuse you instead of making your task easier.
This lagging indicator is one of the most popular and solid analytical tools. It highlights the accurate average price of shares that is confirmed by long-term trends. Its variations like levels of support and resistance show the brackets within which the price fluctuation will happen.
This indicator prompts you if the market is overheated on the buying or selling side. It makes this prediction based on a comparison of today’s closing price to the price brackets that were stretched over time.
MACD (Moving average convergence divergence)
That’s the tool that includes two other tools, namely, two separate moving averages. The MA of day 26 is subtracted from the MA of day 12. The difference predicts the trend for this specific stock.
The exponential moving average (EMA)
This moving average filters data by relevance. It means that for analysis, more recent data is marked as more relevant, and older data is considered secondary. This indicator works well for predicting short-term price changes.
That’s the example of a lagging indicator. It helps identify what the top and the bottom levels of stock price areare the top and the bottom levels of stock price. This indicator was offered by John Bollinger, a financier. The chart looks like bands, where high prices belong to the upper band, and low prices are placed into the lower bands.
The final tip
The optimal number of indicators to use for accurate price predictions is three. Just remember that indicators should complement one another, not provide identical information. Then they will make a powerful tool. Pick the ones that you like, master them well and harness the stock market to your advantage.