What are indicators?
Indicators in the stock market are mathematical calculations which are plotted on as lines on a price chart which can help traders and investors to identify certain signals and trends in the market.
Indicators can be used by the trader and investors to filter out their trades which increases their winning accuracy.
There are basically two types of indicators in the stock market.
Types of Indicators in the Stock Market
- Leading indicators- Leading indicators are technical analysis tools that try to predict the future price movements of stocks based on past data. They can help traders to anticipate the direction and strength of the market trend, as well as identify potential reversal points. Some examples of leading indicators are
- Relative Strength Index (RSI)
- Moving Average Convergence Divergence (MACD).
These indicators are explained further in this article.
- Lagging indicators- Lagging indicators are technical analysis tools that reflect the past performance and direction of the market. They do not predict future price movements, but instead confirm the current trends or signals or a trend reversal after it has already happened. Traders usually use these indicators to confirm their trades and to avoid false breakouts. Some examples of lagging indicators are:
- Moving averages
- Moving Average Convergence Divergence (MACD).
Once you have understood what indicators are and their types, you are ready to understand the different types of indicators used by traders and how they work. These indicators are not the best indicators but instead these indicators are most commonly used indicators by traders.
- Moving Average (MA).
The moving average or simple moving average (SMA) is a lagging indicator. It is an indicator which is used to identify the direction of a current price trend. The moving average (MA) indicator combines price points of an underlying asset over a specific time period and divides the number of data points which creates a line or an average price.
The data used depend on the length of the Moving average. For example, a 50 day moving average requires 50 days of data. This 50 day moving average will act as a support and resistance to the price and by studying this you can actually predict the future possible price.
- Exponential Moving Average (EMA).
An exponential moving average (EMA) is a type of moving average that gives more weight to the recent prices of a stock or an underlying asset. It is a technical indicator which helps a trader to keep track of the trend and momentum of the market. Unlike a simple moving average (SMA), which assigns equal weight to all prices in a period, an EMA reacts faster to the changes in prices and follows them more closely. Exponential Moving Average (EMA) is a lagging indicator.
- Moving Average Convergence Divergence (MACD).
Moving Average Convergence Divergence (MACD) is a leading indicator which finds changes in momentum by comparing two different moving averages. It can help traders and investors to identify buying and selling opportunities around support and resistance.
The term ‘Convergence’ means that two moving averages are coming together, while the ‘divergence’ means that they’re moving away from each other. If moving averages are converging, it means momentum is decreasing, whereas if the moving averages are diverging, momentum is increasing.
- Relative Strength Index (RSI).
I have already created a full length article on Relative Strength Index (RSI) but in short RSI can act both as leading and lagging indicators. Some traders call this indicator a leading indicator and some lagging.
RSI is an oscillator which tells an investor about the momentum in an underlying asset. The value of RSI lies between zero and one hundred.
Relative Strength Index informs you about the overbought and oversold levels which means that if the value of oscillator is above 70 then, the following asset is overbought.
Similarly if the value of RSI is below 30 then, the following asset is oversold.
![what are indicators?](https://www.bhomiiksoan.com/wp-content/uploads/2023/10/Relative-Strength-Index-RSI.jpg)
- Bollinger Bands.
Bollinger bands is a technical indicator which helps a trader to identify the volatility and trend of stock’s price. The width of the band reflects the volatility of an underlying asset. The closer the band to each other the less the volatility in an underlying asset. Similarly, the higher the band the higher the volatility.
It also helps the trader and investor to predict the overbought and the oversold levels of the underlying asset. When a price continually moves outside the upper band it can reflect the overbought zone. Similarly, when the price trades below the lower band it can act as an oversold zone.
Conclusion
In the end I would like to conclude this article by saying that indicators are a great way to filter out your trades and to find the confluence areas which eventually improve your winning percentage but remember that trading completely on the basis of indicators will reduce your accuracy since, lot of the times these indicators give a lot of fake breakouts.