Technical Analysis Indicators and Tools

8.5 Technical Analysis. Indicators and Tools
Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on whatsapp

This mini-blog is part 5 of our Introduction to Technical Analysis unit which forms part of our free introductory course in financial trading. This mini-blog consists of the following:


Technical Indicators

One of the major issues with patterns is that they are never as perfect on a real chart as they are in a text book or course. They can be difficult to spot or it can be subjective as they form just a little bit out of a perfect pattern.

This is why there are other forms of technical analysis tools that are widely used – indicators. Technical indicators use set mathematical parameters and output either a number or lines on a chart. 

This is both their strength and weakness. An indicator’s output will always be consistent with the inputs it is using but this is just an output and it has no meaning without context. Before I go over the most common indicators I will quickly talk about custom indicators and signal services

Custom Indicators and Signal Services:

There are thousands of custom indicators and signal services available on the web. A custom indicator is where a person has taken an idea and through the use of programming created their own indicator that gives some sort of output, drawing or signal on a chart. 

Signal services are similar but are usually in the form of a service that sends you a buy or sell signal.

You should approach these with caution, especially when they promise guaranteed profit or success in the market. 

Before buying any of these you need to make sure that you know what the inputs and outputs are so that you can evaluate it for yourself and never believe promises guaranteed returns – this doesn’t exist.

Custom indicators can be useful when used sensibly – mostly to aid you in your own analysis of the charts or your own strategy. They can also be helpful for speeding up common tasks or to give visual clues when looking through a lot of data.

Most Common Indicators

Lagging indicators

These tend to use aggregated data or longer time set data and are often used to confirm trends or supplement overall analysis. Trend indicators such as Moving Averages are a good example of a lagging indicator.

Lagging Indicators

Leading indicators

The name can be a bit misleading as leading indicators still use data from the past as all indicators do.

Leading indicators are used to try and predict future price movements and potential entry and exit positions. As such these indicators often analyse metrics related to changes in price action such as Momentum and Volatility. 

Examples in these categories include:

Momentum Indicators:

  • Stochastic indicators
  • RSI
  • MACD
Leading Indicators

Support and Resistance:

Support and resistance are key levels and the most common indicators used for this are:

Pivot Points
  • Pivot Points. These are calculations used to determine the overall trend of the market over different time frames. The pivot point itself is an average of the high, low and closing prices from the previous trading day.
  • Fibonacci Levels. Based on Fibonacci numbers, these are retracement levels that indicate likely support and resistance levels. Each level is associated with a percentage retracement which are 23.6%, 38.2%, 61.8%. While not officially a Fibonacci ratio, 50% is also used. The indicator can be drawn between any two significant price points, such as a high and a low and will then create the levels between them.
Fibonacci Levels

Volatility Indicators:

Volatility measures the size and frequency of changes in the price of a market (how fast a price moves and the range of movement). Volatility can be a single of price or trend breakouts.

  • Average True Range (ATR). Shows how much a price moves on average during a given time frame. The indicator can help day traders confirm entry points or manage risk levels (stop orders).
  • Bollinger Bands. Named after John Bollinger, this is a price channel that follows price movements and volatility. Bands are plotted two standard deviations above and below a moving average. Bands will be wider during increased volatility and narrow during decreased volatility.
Volatility Indicators

A final category are: 

Volume indicators:

Volume is a measure that is often overlooked in trading but is important as volume (and especially a lack of volume) can have a definite impact on a market.

As we learnt in previous units, market volume is a measure of the amount of liquidity in a market and a lack of liquidity (a lack of buyers and sellers) can lead to large price fluctuations which can cause a spike in volatility.

As such, volume indicators are useful confirmation indicators.

Some common volume indicators are:

  • Money Flow Index
  • On Balance Volume
  • Accumulation / Distribution
Volume Indicators

Summary

This completes the mini series of units that form the Introduction to Technical Analysis. I hope that you found this useful as an overview. 

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

Scroll to Top