Trading indicators are patterns that are identifiable on charts and give you an insight into how an asset’s price is performing. From forex to stock trading, these technical indicators act as signals that can help determine when you should enter and exit positions, and whether you should buy or sell.
This article at a glance:
- Trading indicators use price data and buy/sell volume to signal price patterns or trends.
- These can be leading or lagging, and are heavily used in technical analysis
- They can also be classified as trend, momentum, volatility or volume indicators
Types of trading indicators
Trading indicators use price data and buy/sell volume to signal price patterns or trends. Market indicators are used in technical analysis to determine how markets may move, and when it might be best to buy or sell.
Generally, trading indicators will be leading or lagging. Leading indicators provide signals (i.e., calls to action) before a potentially significant price movement happens. Lagging indicators are signals that occur after a significant price movement has taken place.
Trend indicators tell you the direction that prices are moving in. Prices can trend upwards, downwards, or sideways (a plateau). Some of the top trend indicator patterns you can use are moving average and moving average oscillators.
Momentum indicators determine how strong or weak an asset’s price is, based on how sharply its value is rising or falling. You can use the momentum indicator settings on various trading platforms, including MT4, to look at the strength of price trends. Some momentum indicators you can use are the Relative Strength Index (RSI), the Moving Average Convergence Divergence (MACD), and the Average Directional Index(ADX) indicators.
A volatility indicator tells you how far above or below an asset’s price is moving, in relation to its average (mean) price. Popular volatility trading indicators you can use for forex and stocks are Bollinger Bands, Average True Range (ATR), and the Keltner Channel.
A volume indicator tells you how much an asset, such as a particular stock, has been traded over a specified period. A popular volume indicator in technical analysis is On-balance volume (OBV). Volume RSI is also popular, as is the Chaikin volume indicator.
Support and resistance indicators
Support and resistance technical indicators find the proverbial floor and ceiling prices for an asset. The support level is the floor price, (i.e. the lowest price) that’s been established over a meaningful period of time.
The resistance level is the ceiling price, or the highest price that’s been established over time. When the price moves below the support line or above the resistance line, it’s known as a breakout.
Popular trading indicators
If you are just starting out with your trading journey, check out these popular trading indicators to aid your trading decisions:
Simple moving average (SMA)
It shows the average price of an asset across different points. A downward moving line indicates a bearish trend, whereas an upward line indicates a bullish market.
Exponential moving average (EMA)
This indicator works like the SMA, but places more emphasis on recent data.
Oscillator trading indicators compare the closing prices of an asset over time to show the momentum and strength of a price trend.
Moving average convergence divergence (MACD)
This indicator compares two moving averages to show whether they’re converging or diverging. If the averages are converging, momentum is decreasing, and it may be time to sell. If they’re diverging, momentum is increasing, and can be seen as a buy signal.
This technical indicator uses price data to form two “bands” above and below the SMA. The closer these bands are, the lower the volatility in the market. This, along with how close prices are moving to either band, can be interpreted in different ways to understand potential trends.
Using indicators in trading
Trading indicators are central to technical analysis, and useful to all kinds of trading styles. In fact, these indicators are often used in conjunction with each other for a more rounded understanding of how prices are moving, and how they may continue to move.
At the same time, they don’t eliminate risk. The information they provide does not guarantee a successful trade. When using these indicators, make them a part of a wider strategy that considers other factors, such as risk management.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.