Technical Analysis: Introducing Technical Indicators

Technical indicators and oscillators are very important tools that help a trader in framing trading strategies. They help the traders to identify the tradable entry and the exit points. In this article, leading and lagging indicators are discussed, to give new traders an insight into the profitable world of technical indicators.

A technical indicator is a series of points that are mathematically calculated using historical prices, volumes and open interests about the asset. The points are derived by putting the price data into formula.

Why technical indicators are so important?

Technical indicators offer different information that is useful to the traders. Some technical indicator formulas are easy, while some can be complicated. The indicators help traders to gain different perspective of the market which helps them to analyse the price action in a better way. In this article, technical indicators are explained in details. The following information has been extracted from the experts of easymarkets.com.

Basically, indicators have three main functions:

Alert the traders: Indicators alert the traders and motivate them to give a detailed look on price action when it is necessary.

Confirm: Indicators can be used to confirm the results of the other technical analysis tools.

Prediction: Indicators can also help traders to make prediction about the future direction of prices.

Many traders say that indicators are not useful at all. But this is because, these traders forgo the most important point when they use technical indicators. The point is that, indicators only indicate. They are like hints. Traders need to consider price action along with indicator. They must also apply their trading skills. Indicators help in filtering the noise in the market through formulas.

Leading indicators

A leading indicator, as the name implies, is an indicator that leads the price movement in the market.  This indicator is a measurable factor that leads the change and hints the traders that the economy is going to follow through. Leading indicator gives insight about the direction in which the economy is moving. Some of the popular leading indicators are discussed below:

RSI

Relative strength index or RSI is a momentum indicator which was developed by the famous analyst Welles Wilder. It compares the recent gains and losses over a period of time and calculates speed and change of price movement. Traders can identify overbought and oversold conditions prevailing in the market.

Stochastic oscillator

It is a momentum indicator that helps a trader to find an accurate buying and selling point, by comparing the closing prices of an asset over a period of time with the range of its prices.

Lagging indicators

Lagging indicators are those indicators that follow the trend or price action. The lagging indicator is a factor that can be measured and it changes after the economy has started to follow a particular trend.  These indicators mark the price action of an underlying asset. Here are some of the popular lagging indicators.

MACD

Moving Average Convergence Divergence is a lagging indicator. It is a momentum indicator which shows the relationship between two moving averages of prices. MACD is calculated by subtracting 26-day exponential moving average (EMA) from the 12 day EMA. A nine day EMA is also plotted to trigger the buying and selling signals.

Moving averages

Moving Average or MA is a very popular indicator used by almost every trader. This trend following indicator helps to filter out the random price fluctuations. There are two main types of MA- simple MA and exponential MA. Moving average also forms the basis of other indicators.

Indicators, both leading and lagging, help the traders to trade better, as they provide valuable insights about the market. If used properly, traders can improve their success in the market by proficient analysis. 

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