Whether it is forex trading, share trading, or commodities trading, it is important to understand the market trends before investing; here is where trading indicators help the investors to gauge the right time for making any investment and reap the maximum return therefrom. Market Trend Analysis can be categorized into two important categories; Fundamental analysis and technical analysis. Both the fundamental and the technical analysis have their pros and cons and investors fall in either of the two categories.
When an investor is trying to get the most potential stock picks, it is important that he is accustomed to spotting a valuable evaluator that can effectively make out the difference between losing and winning trades. Interestingly, some of the top fundamental stock market trading indicators happen to exit completely outside the stock markets, and identifying them at the right time is crucial that cannot be missed out in any way whatsoever. Unemployment rates, interest rates, and RSI (Relative Strength Index) are among the other top fundamental stock market trading indicators that can help an investor to assess the right time to enter the stock market.
Some of the fundamental stock market trading indicators are discussed hereunder:
Fundamental Trading Indicators
Unemployment rates and stock market trends are inversely proportional to each other. When there is a surge in the unemployment rate in a country it implies that a large percentage of working demographics are removed from the workforce. Owing to this, consumer spending will reduce drastically, which will again have a negative impact on the business revenue of the nation.
These increasing unemployment rates are met with sharp selloffs in the stock market in the hope that when unemployment rates fall, the stock market will automatically experience a surge in investments and funds.
The interest rate is yet another common stock evaluator of the existing domestic economy, and the reason is quite simple and straightforward. As the Federal Reserve raises its interest rates, the cost of borrowing money is also increased by banks and other lenders by consequently increasing their interest rates for consumer lending. This surge in the interest rates forbids the entrepreneurs and small business owners to take large loans from banks and other lending institutions, thereby stagnating the domestic economy’s growth rate across the nation.
On the contrary, reduced rates of interest encourage people to take more loans, which catalyzes the growth and domestic economy of a nation. This is actually what happens in times of recession or economic stagnation.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is one of the strongest tools that was developed by Welles Wilder and is used to depict the trade’s ongoing momentum. The formula is derived from calculations of recent gains or losses in a trade during a particular period. For this, a designated time frame is established, and the total number of gains and losses sustained by a particular stock is used to determine whether or not that particular stock is overbought or oversold at that moment. The Relative Strength Index serves as the marketing tool when there is high volatility in trade. It provides valuable insight into the upcoming marketing trends and whether it will be wise to invest in a particular stock at that time.
Technical Trading Indicators
Technical trading indicators consist of patterns and charts to depict stocks’ price movement based on which the investors can decide the perfect time to enter the stock market. Technical analysis relies on various mathematical indexes and statistics. By looking at the various chart patterns (that may be in the form of bars and lines or indicators like moving averages or trading volumes), one can easily find the direction of stocks’ price movements, whether upward or downward.
Technical indicators can help to predict other markets apart from the stocks, like futures or the commodities market, etc. Technical indicators can be assessed as quickly as possible by looking at the strength and direction of market trends. It can be used exclusively as a standalone method for technical analysis, or can also be used together with the fundamental indicators or even with other marketing techniques in combination.
Technical indicators can be further categorized into five classes, Trend, Relative Strength, Mean Reversion, Momentum, and Volume. Trend technical indicators depict in which direction the marketing trend is moving, up, down, or sideways. Relative Strength indicators measure the oscillations in stock buying and selling. Mean Reversion measures how far a price swing can stretch before any trigger is received from a counter impulse. Momentum Indicators evaluate the price change speed over time, and the volume indicators tally trades to quantify whether the existing market calls for a bullish or bearish control. Based on these five types, there are various technical indicators that are used by investors.
Some of the technical stock market indicators are discussed hereunder as follows:
Moving Average – Trend Indicators
Moving Average is one of the popular stock market technical indicators that help in identifying the current price trend direction. The moving average tool combines the price points of a particular financial instrument over a specified period and then divides the result by the total number of data points to arrive at a single line of trend. The number of data points required would depend on how long the moving average is. Apart from evaluating the existing trend pattern, the moving average tool can also be used to predict possible future trend patterns.
MACD or the Moving Average Convergence Divergence Indicator – Momentum Indicators
The Moving Average Convergence Divergence tool detects the spiking changes in momentum by comparing 2 Moving Averages. The MACD tool helps traders to identify possible buying and selling opportunities around resistance and support levels.
The term “Convergence” means the coming together of 2 Moving Averages, while “Divergence” means that the 2 Moving Averages are moving away from each other. The Momentum decreases when the 2 Moving Averages converge, increasing when the moving averages are diverging.
EMA or the Exponential Moving Average – Trend Indicators
The Exponential Moving Average trading indicator is similar to the Moving Average indicator, with the only difference that lies in the fact that it gives more weightage to recent data points, thereby making the data points more receptive to new information. EMAs can help traders to confirm significant trade movements effectively. The most popular EMAs for short term averages are 12 and 26 days EMAs, while for long term trends, the best EMAs are 50 and 200 days EMAs.
Bollinger Bands- Mean Reversion Indicators
The Bollinger Bands indicator was propounded by John Bollinger and is one of the best stock trading tools that the investors can rely upon. It measures volatility as an indicator of the current market trends. The Bollinger Bands bases its approach on the concepts of “elasticity” and hence named as “bands” and follows two parameters; 1) The number of days for the calculation of Moving Average and 2) How many deviations the investors want the band to be placed away from the Moving Average. It bases its idea on the fact that price will definitely bounce back just like an elastic band.
Bollinger Bands indicator shows the maximum and the minimum points that the price of an instrument can reach. For example, suppose the bands are far away from the current price, then it signifies that the market is very volatile, and on the contrary, if the bands are too close to the current price, it will imply the least volatility. When an asset is trading outside its usual levels, the Bollinger Bands serves as the best stock volatility evaluating tool that can be used to predict long-term price movements.
OBV or the On-Balance-Volume- Volume Indicators
By itself, Volume is a powerful technical indicator, and OBV compiles this valuable volume information to reach a single one-line indicator. The On-Balance-Volume indicator measures the cumulative buying and selling pressures by adding up the volume on “up” days and similarly subtracting the volume on “down” days.
On-Balance Volume analysis was founded by Joe Granville back in the year 1963. It basically measures the positive or negative flow of the buying or selling volume and evaluates the relationship between the volume and the change in stocks’ price. The OBV indicator follows the principle that volume precedes price, which shows that it attracts greater volume when the price rises. Conversely, with the fall in price, the volume also goes down. The OBV indicator helps the investors to find out whether a particular currency is bought or sold, thereby indicating the trend or direction of the money flow, whether it is in or out of the currency. Moreover, investors can also use this indicator to forecast future trends. However, there is a disadvantage in using this indicator, as this indicator cannot be used solely; it has to be used in combination with other indicators.
Average Directional Index (ADX) -Trend Indicators
ADX is used to measure the strength of price trends and is plotted as a single line on a graph with values ranging from 0 to100. It helps investors to identify the strongest zone with an ADX above 20, signifying that the trend is getting stronger. A value above 50 indicates the exhaustion of the trend.
Commodity Channel Index Indicator (CCI)
The CCI indicator helps in evaluating the difference between the historical average price of an asset and its current price. If the difference is above 0 (zero), it implies that the price is above the historic average, and on the contrary, if the value is below 0, it means that the price is below the historical average.
Such information about the direction of price trend and strength helps investors to decide whether they want to enter a market or exit from it.
However, whether fundamental or technical no single stock trend evaluator, can take you to experience all the trade riches. It is only the set of stock trading strategies that could withstand the test of time to sustain as powerful tools for trend investors. For example, the Moving Averages indicator is a time-tested tool that uses a constantly updated average price to smoothen the price data. Again, the MACD method, which is the Moving Average convergence divergence technical analysis tool. An oscillating indicator that can help the traders to quickly gauge the increasing short-term momentum. This average convergence divergence MACD is the most famous indicator that the investors can rely upon blindly. Then there is another momentum indicator RSI or the Relative Strength Index, which measures the magnitude of the recent change in the stock prices to determine whether there is any overbought or oversold stock. Investors can use their own risk appetites and knowledge to decide which of these indicators best suits their trading strategies.
1. What is the best volatility indicator?
The Bollinger Bands is the best volatility evaluator that provides a typical price range within which the investors can trade any particular asset. With the increase and decrease of the bands’ width, the stock trading evaluator reflects the recent volatility that exists in the stock market. The wider the bands, the higher will be the volatility.
2. What is the most accurate indicator of the stock market?
There is no single accurate indicator for the stock market as such, it all depends on the market situations prevailing at a particular period. The investors should use their knowledge and expertise before using any particular tool and decide the perfect time to enter the stock market to reap the maximum Return On Investment (ROI).
3. What are the best trading indicators?
Among the numerous trading indicators, the Moving Average indicator, the average convergence divergence MACD indicator, the Relative Strength indicator, and the On-Balance-Volume indicator are considered the best trading indicators in terms of convenience of the investors and traders.
4. Which is the best trend indicator?
The Moving Average indicator is considered the best trend indicator to identify the current trend in price.
5. What are the best volume indicators?
The OBV or the On-Balance-Volume indicator is considered the best volume indicator with only one disadvantage that it is not so reliable when used alone. Therefore, the OBV indicator has to be used in combination with other indicators or marketing techniques.