Beginner's Guide to Stock Market Indicators

basics of stock indicators explained

Hundreds of Technical Market Indicators, trading systems, investment timing models, and other strategies are available. Some are effective, while others are not.

But the questions that come to our mind are, How can we tell the difference?  When and how should we use the best indicators? How can we truly claim a system as our own? How can we avoid common errors of judgment? How can we identify and avoid flawed ideas? How can we tell the difference between wheat and chaff, fact and fiction, myth and reality? How do we find appropriate tools for different market environments and investment goals?

In this series, we are going to provide the best answer to all of these questions. We'll talk about the "Technical Market Indicator" which can boost your trading strategy to produce useful results if we use it correctly.

This course is designed in such a way that you will be able to choose the most appropriate indicators to use based on your goals, whether they are short-term trading, long-term investing, or aggressive speculation.

The first thing that we want to cover with you is what indicators actually are?

Technical market indicators are designed to identify trends and trend changes without concern for underlying causes and effects. A technical analysis indicator is nothing but a graphical representation of "Price Action".

There are hundreds of indicators that exist and these indicators were developed over decades of close daily observation of market price action behavior by intensely involved market participants. Technical market indicators are used by the world's best investors and traders because they are meant to make the very complicated process of making investment decisions relatively easy and effective.

Finding the best indicator is quite difficult as there are hundreds of indicators in use today and more are created every week but don't worry this course will save your years of time and effort.

Technical indicators serve three main functions :
  1. Alert
  2. Predict
  3. Confirm

Your buy or sell call should not be solely based on the indicators. Make sure that you take the help of other tools as well. In simple words don't tend to ignore the price action of a security and focus solely on indicators.

Types Of Indicators

There are various types of indicators available in the financial market like momentum, trend, confirming, tape indicator, and many more. All these indicators are classified into two categories:

  1. Leading Indicators Ex - Moving Averages
  2. Lagging Indicators Ex - Stochastic and MACD
We'll discuss these indicators in the next module in detail.

Don't try to master all the technical analysis indicators or oscillators.
Try to find a few of them which complement your trading system in the best way.

Advantages Of Technical Indicators

  • Indicators can act as an alarm, alerting a technical analyst of any major price action or volatility.
  • Technical indicators allow us to execute trades confidently.
  • It reflects investor's sentiments.
  • Helps the investors/traders to know when to enter or exit a trade to make a profit.
  • Indicators can help to interpret the market patterns and the future behavior of the price.
  • The best part is the same indicators are used by top-performing traders, investors, hedge funds, and other participants.
  • You may use technical indicators to capture the trend's momentum.
  • Each indicator provides unique information.
  • Technical Indicators are based on a set of rules that can maximize our reward to risk performance.
Components of Technical Indicators:
  • Time
  • Patterns
  • Volume
  • Support and resistance levels

The above points are the main components of an Indicator. Traders always try to predict these components.

Common Errors To Avoid

Many investment concepts are logically flawed from the beginning. Logic and common sense can help you save time and energy.
Before implementing any indicators into your trading strategy, it is essential to be aware of the following common mistakes made by traders:

  • Don't use multiple indicators of the same type. For example stochastic and RSI, both tell you the same thing about overbought and oversold. Avoid this type of mistake.
  • An Indicator stand alone is pretty weak, wait for other confirmation.
  • After a large price change, avoid utilizing indicators.
  • Cut your losses if the indicator fails. Look for another trade.
  • Don't apply technical indicators intended for one asset class to another.
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