Tutorials | Technical Indicators Tutorial |
Written by TradingEducation.com |
Price is the primary tool of technical analysis because it reflects every factor affecting the value of a market. However, price doesn't produce just trend lines and basic chart patterns. Analysts have expanded their research far beyond those basic elements to develop a number of technical indicators that provide more insight into price action than what you see on the surface. You may be able to see that a market is “extended” (overbought or oversold) just by looking at a bar chart, but an indicator can put a number to it and confirm your thinking.
First, a warning about indicators in general. Most analysts do not rely on only one indicator but often use several indicators together to help make a trading decision because of the misleading information one indicator might provide. An oscillator indicator is not a trading system but only provides helpful insights in certain market conditions.
Oscillators tend not to work well in markets that are in a strong trend. They can show a market at either an overbought or oversold reading for an extended period while the market continues to trend strongly. Another example of oscillators not working well is when a market trades into the upper boundary of a congestion area on the chart and then breaks out on the upside of the congestion area. At that point, it's likely that an oscillator would show the market as being overbought and possibly generate a sell signal when, in fact, the market is just beginning to show its real upside power.
From a list of literally hundreds of technical indicators, we have selected the more popular ones to illustrate what is available. These technical indicators can be put into several categories:
- Strength and Sentiment Indicators
- Trend Indicators
- Volatility Indicators
- Momentum Indicators