Types of Trading Indicators
Traders can use technical indicators, also known as trading indicators, to get an idea of where a security’s price is heading. Trading indicators use past price behaviors to predict future moves. Traders add trading indicators to a security’s price chart to see if any patterns suggest a good spot to enter or exit a trade. Trading indicators are classified as leading or lagging indicators. Leading indicators reveal a trend change or a reversal before it’s established. Lagging indicators confirm the strength of an existing trend.
Trend indicators are lagging indicators that measure if an established trend is weakening or strengthening. The moving average indicator smooths over price data to show if a security is in an uptrend or downtrend. The MACD, or moving average convergence divergence, measures a trend’s strength. Bollinger bands can indicate a trend reversal based on the security being overbought or oversold. Direction movement indicates trend strength by measuring if buyers or sellers are strong enough to push the price past the previous day’s high or low.
Momentum indicators are classified as leading indicators. Momentum indicators measure how fast or slow a price changes over a specific period. The advance decline ratio indicates overbought and oversold conditions based on extremely high or low prices. The relative strength index measures the strength of the price changes. Stochastics uses the strength of a price swing to indicate trend changes or reversals. The "Williams %R Indicator" uses prices that are spread over several days to determine if a security is overextended to indicate a trend reversal.
Volatility indicators are lagging indicators that measure the amount of market activity in a security. High volatility indicates strong buying and selling, while low volatility indicates lowered trading activity. The average true range measures the degree of price movements to establish high or low volatility levels. Fibonacci retracement uses changes in price movements to indicate support, resistance and potential breakout levels. The ultimate oscillator uses buying or selling strength to find overbought and oversold levels.
Volume indicators are lagging indicators that measure how much interest traders have in a security. The accumulation distribution oscillator indicates the power behind buying and selling activity. The Chaikin oscillator measures if trading activity in a security is increasing or decreasing. The money flow indicator does exactly what it says: It follows how much money is flowing into or out of a security based on buying and selling activity.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.