August 29, 2010

Types of Technical Indicators

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Types of Technical Indicators

The basic one, called a moving average, involves a simple formula that analyzes the average price of a security or commodity over a period of time, and when isolating time periods, it is much easier to spot different trends. Other types of indicators belong to four major groups, as follows:
  • Momentum indicators - Stochastic oscillator, Commodity channel index, RSI, Chande momentum oscillator (CMO) and more.
  • Volatility indicators - Bollinger bands, projection oscillator, average true range, Trading bands (envelope) and more.
  • Trend indicators - MACD, parabolic SAR, linear regression, Forecast oscillator and more.
  • Volume related indicators - Ease of movement, OBV, Demand index, Chaikin money flow and more.

In technical analysis, trading indicators can be categorized into three main categories as follows:

1. Leading indicators
This type of indicators tend to give traders buy or sell signals before market makes its turn. The leading indicators predict a top or a bottom of a market but they do not predict specific price levels or duration of a move. Although there are so many leading indicators in theory, it is hardly to find ones that truly lead the markets. The Leading indicators are considered to be the most useful for the beginning traders since they allow ample time for traders to prepare their trades. One thing to remember when applying leading indicators in trading is they are just telling that a move is going to happen but it has not begun yet. While it seems like leading indicators offer traders the best of all worlds, there are drawbacks when using such indicators.
One major problem occurs because it may point traders to enter a trade too early. Exposure to price fluctuations that occur before the beginning of the indicated up or down trend may cause traders to bail out early. When traders are limiting risk in a particular trade but have bought early according to a leading indicator, they may be stopped out and lose all potential for profit.

2. Time current indicators
This type of indicators tend to turn higher or lower at about the same time that a market does. They can be very helpful in long-term trading, and are considered such indicators practically as useful as leading indicators.
Though, the time current indicator does not expose to pre-move price fluctuations as much as the leading indicator does. However, traders have to make their decisions about buying and selling quickly with indicators, as the price should be making its move at the same time they are taking a position.

3. Lagging indicators
This type of indicators are those that lag behind market movements. The market moves,and the lagging indicator moves after it. These indicators are also referred to as trend-following indicators because they just follow trends and do not attempt to predict them. Using lagging indicators to make decisions about buying and selling gives traders disadvantage since this will results in buying and selling after the tops and bottoms of market trends. The goal in using a lagging indicator is that traders will be able to profitably grab a significant portion of a trend before the indicator changes direction again.

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