Can you outline some popular technical indicators that are generally used by traders and investors in the market?

Traders work on a body of knowledge called technical analysis. It is not just a study of charts but a study of underlying trends in the market, the message of the market and the breakouts in the market. Technicals are not a perfect science but it is largely based on interpretation of trends. Different traders can interpret the same trend differently but there are some set rules on which such interpretation is based. That is what technical indicators are all about.

Technical analysis forms the basis for most traders and even for investors it does form the basis on which the entry and exit is timed. Most of the smart investors, even after spending hours delving into cash flows and balance sheets; do use technical indicators to time their entry and exit for that extra bit of alpha. The whole story becomes a lot simpler when we look at technical analysis as an adjunct to the investment decision process rather than an alternative decision process. Let us look at in detail at how to use technical analysis to trade stocks?

Trading the charts through technicals:

Technical charts capture the collective intelligence on stocks through simple and elegant graphs. Then these graphs can be sliced to identify critical trends and turnaround signals. While there are countless of indicators with different levels of complexity like Dow Theory, Gann trading etc here are 4 such technical indicators to apply on a regular basis…

How to use the power of moving averages

Moving averages, as the name suggests, are dynamic unlike static prices. These moving averages form one of the basic pillars technical charting for trading. Moving averages make it easy for a trader to identify trading opportunities within the overall direction of the market. There is an underlying trend and then there are sub-ideas called trading opportunities. The moving averaging is a typical average where the data point keeps skipping and calculating. Popular moving averages are the 50 DMA, 100 DMA and the 200 DMA. Normally, moving average charts are plotted along with actual price charts to get signals on trading. The moving averages are very useful in identifying the supports and resistance levels of the stock. Normally, supports and resistances are created when the stock chart keeps consistently hitting around the 200 DMA or when the price chart decisively breaks above or below such moving average lines.

An oscillator called the Relative Strength Index (RSI)

The Relative Strength Index (RSI) is also called an oscillator as it helps you identify range within with the stock price will oscillate. There will be an upper end to the normal range and a lower end to the normal range. Normally stocks that are overbought tend to become a classic case for either selling or shorting while stocks that are oversold become candidates for buying at lower levels. RSI answers the critical question of entry and exit. The RSI is plotted on a scale of 0-100. An RSI level of 100 indicates that the stock is extremely overbought while a level of 0 indicates that the stock is extremely oversold. Remember that 100 and 0 are theoretical levels and not exactly practical levels. The RSI for most stocks ranges between 30 and 70. Stocks are considered to be oversold around the RSI of 30 while stocks are considered to be overbought around the RSI level of 70. That is the benchmark that traders can use to trade the market.

Adding reliability to oscillators through the use of Stochastic

Like the RSI, the stochastic are also an oscillator, in the sense that they also give indications of when a stock is overbought and when it is oversold. Relatively, the Stochastics is more reliable and affirmative of these zones compared to RSI and is used more often by professional traders. Stochastics interpretation is slightly more complex than RSI and hence it is used more by professional traders only. The RSI does not look for a double confirmation before identifying overbought and oversold zones. The Stochastics goes one step ahead and also identifies %K line and the %D line and uses a crossover to identify the oversold levels with much greater conviction and empirical success rate. When traders need to commit bigger money on a trend, they use stochastic charts rather than plain vanilla RSI.

How to use the Moving Average Convergence Divergence (MACD)

The MACD is referred to as the king of technical indicators since it encompasses moving averages and oscillators. MACD not only identifies the overbought and oversold zones in the chart but also identifies the right levels of entry and exit. MACD is flexible as it can be used in range-bound markets as well as in trending markets. This is the process flow. You first recognize the lines in relation to the zero line which identify an upward or downward bias in the stock price. Secondly, you try and identify the cross over or cross under of the red line and the blue line to get the appropriate trading signal.

It would not be inappropriate to say that technical charts are the life line of a trader. The four trends above form the pillars of technical charting!