Top 10 Best Indicators & Overlays For Technical Analysis

Introduction:-

There are lots of indicator for technical analysis that can be used for predict the price movement. Here we cover that top 10 best indicators and overlays for technical analysis which are used by most often and by most of the traders.

What is the Indicator?:-

Technical indicators are mathematical calculations based on the price, volume, or open interest of a security or contract. By analyzing historical data, technical analysts use indicators to predict future price movements.

Technical indicators are focusing on historical trading data and that is based on price, volume, or open interest and not based on fundamental data like earning, revenue, or profit margin and used by the active trader.

An indicator in common language it is a tool that is used for an indicate future movement from historical series of data on the plotted chart. This series of data derived from different time and arranged it on a graph.

an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison.

Top 10 Best Indicators & Overlays For Technical Analysis:-

1) Moving Average:-
  • This indicator is used for display the average price of an instrument over a specific period of time.
  • Moving average made from the sum of different price and divided by selected period. example, if you want to get 5 days moving average then you select 5 days price i.e., 10,12,13,10 and 11. total of the price of different days and it is 56 and divided by days and that is 11.2 and then get other moving average numbers by doing the same process.
  • Different periods can choose to predict short-term and long-term price direction i.e., 10 days, 50 days or 100 days.
  • We can predict that if a price is above the moving average, it stands that price is moving up and if a price is below the moving average, it stands to reason that price is moving down.

 

In the above image, you can see a red line that is 50-day moving average and the blue line is 15-day moving average.

2) MACD:-
  • MACD full form is Moving Average Convergence/Divergence which is a very effective indicator that gives a more accurate result.
  • in which it consists, Moving average, into a momentum oscillator by subtracting the longer moving average from the shorter moving average.
  • When the shorter-term 12-period exponential moving average (EMA) crosses over the longer-term 26-period EMA a potential buy signal is generated
  • In MACD line, if the price is above 12 and 26 EMA and MACD line are above 0 that means a trend is up.

In the above image, you can see MACD line below the candlestick chart. in which you can get buy and sell signals on MACD crossover.

3) RSI:-
  • RSI full form is Relative Strength Index. This measures the magnitude of recent price changes to analyze overbought or oversold conditions.
  • It considers overbought when above 70 and oversold when below 30, also you can use middle 50 level, in that if RSI is above 50 then it shows uptrend and below it means it shows a downtrend.
  • It alone should not be used because if sudden movement occurs it creates false signals so used with other indicators.
  • Divergence is also important. if price shows new highs or lows but RSI does not reflect. Bearish divergence if price reflect new high but RSI does not and Bullish divergence if the price reflects new lows but RSI does not.

In the above image, you can clearly see that buy and sell signals formation from RSI overbought and oversold levels.

4) Stochastic:-
  • A technical investment analysis tool used to measure a security’s closing price in comparison to its price range over a given period of time.
  • It shows movement before the price change. the stochastic indicator is used for three things-
  1. Identify overbought and oversold levels
  2. Spotting Divergences
  3. Identifying bull and bear setups or signals

In the above image, Below line is a stochastic line in which you can see oversold level and we discuss Divergence and bull/bear setups in next time with full details.

5) Bollinger Band:-

It is a band of three lines which are plotted in relation to security price.

  1. The middle line is usually a Simple Moving average set to a period of 20 Days.
  2. The upper band – Typically set to 2 standard deviations upside from the SMA
  3. The Lower band – Typically set to 2 standard deviations downside from the SMA
  • Bollinger bands are usually used to measure and visualize volatility. Volatility increase, the wider the band become and volatility decrease, the gap between bands narrows.

6) Pivot Points:-
  • Pivot Points are used to set Support and resistance levels. One more thing, Pivot points use prior period’s High, Low and Close to estimate the future support and resistance levels.
  • One important thing, Pivot points are not changed and remain the same through the day.
  • There are two types of pivot points:
  1. Standard Pivot Point: Begins with base pivot point.
  2. Fibonacci Points: Fibonacci multiple of the high-low differential are added to form resistance levels and subtracted to form support levels.

7) Ichimoku Cloud:-
  • Ichimoku Cloud that shows support and resistance, and momentum and trend direction.
  • This Ichimoku Cloud use moving averages called as tenkan-sen and kiijun-sen to show bullish and bearish crossover points. The cloud called Kumo, are formed between spans of the average of the tenkan-sen and kijun-sen plotted six months ahead (senkou span A), and of the midpoint of the 52-period high and low (senkou span B) plotted six months ahead.
  • The trend is showing up when a price is above the cloud, down when prices are below the cloud and flat when they are in the cloud itself.
8) Parabolic SAR:-
  • Parabolic is used for time/Price system and SAR stands for “Stop and Reverse”.
  • The indicator is below prices when prices are rising and above prices when prices are falling. In this regard, the indicator stops and reverses when the price trend reverses and breaks above or below the indicator.

9) Average Directional Index (ADX):-
  • ADX is used to determine when a price is trending strongly, used to quantify trend strength. based on a moving average of price range expansion over a given period of time. The default setting is 14 bars, although other time periods can be used.
  • The other two line, Plus Directional Indicator(+DI) and Minus Directional Indicator(-DI)are derived from smoothed averages of these differences, and measure trend direction over time. These two indicators are often referred to collectively as the Directional Movement Indicator (DMI).
  • The Average Directional Index (ADX) is in turn derived from the smoothed averages of the difference between +DI and -DI, and measures the strength of the trend (regardless of direction) over time.

10) Volume:-
  • This indicator is also very important while trading. In this indicator, it shows buying and selling of traders for its turnover. this is an indicator is different from others because it not use price to predict the trend.
  • Simple to understand. Plotted in the color column: Green indicates up the volume and buying the interest of others and red indicated down and selling pressure.
  • A sudden increase in trading volume points to an increased probability of the price changing. News events are typical moments when the volume can increase.

References:

https://www.tradingview.com
https://www.investopedia.com
http://stockcharts.com
https://learn.tradimo.com

Author:

Mr. Keyur J Ghadiyali,
Financial Planner,
From, Absolute FinPlanner (absolutefinplanner.com)
Mail Id: keyur.ghadiyali@gmail.com
Contact number: 8238418279

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