With advancements in technology, technical trading has become more popular. Many brokerages now offer charting with built-in technical indicators. There are free sites out there as well.
Not all technical indicators are useful, though. On top of that, some will work for a while and then lose their predictive abilities. That’s why it’s important to adapt to stock market changes. And that’s why we’ve put together this guide.
Below, you’ll find 10 of the top charting indicators to use in 2021. Whether you’re looking for big swing trading trends or micro day trading trends, these techniques can lend a hand…
Top Technical Indicators
- Relative Strength Index (RSI)
- Moving Average Convergence/Divergence (MACD)
- On-Balance Volume (OBV)
- Accumulation/Distribution Line (A/D Line)
- Average Directional Index (ADX)
- Aroon Oscillator
- Stochastic Oscillator
- Bollinger Bands
- Fibonacci Retracements
- Average True Range (ATR)
There are many ways to use these indicators. The explanations below are high-level and can set you on a better path forward. To start, let’s look at the useful RSI indicator…
Relative Strength Index moves between zero and 100. It plots recent price gains vs. losses, and this can help in determining a trend’s strength. When RSI is below 30, traders consider the asset oversold. And when it climbs above 70, traders consider it overbought.
Moving Average Convergence/Divergence is useful for identifying trend direction and momentum. It uses one line for moving price average and compares it with another. And you’ll find this technical indicator with different time frames. When the lines cross, that can signal a buying or selling opportunity, depending on whether it climbs above or drops below.
On-Balance Volume measures how much of an asset traders exchange each day. It’s one of the easier indicators to calculate. It’s a running total of up-volume minus down-volume. And to determine whether to add or subtract the volume, you look at the asset’s price. If the asset’s price moves up, that’s up-volume. OBV can show positive and negative trends.
The Accumulation/Distribution Line is similar to OBV. It doesn’t look only at the price of a security, though. The A/D Line compares it with a trading range. The closer it is to the high of the day, the more weight it carries in the calculation.
Average Directional Index is another technical indicator that measures a trend’s strength and momentum. A score above 40 indicates a strong directional trend, and a score below 20 signifies a weak or nonexistent trend. And ADX alone doesn’t signal in which direction a trend is moving… but that’s easy to see when comparing it with a standard price chart.
The Aroon Oscillator helps show if an asset is trending and if it’s hitting new highs or lows. This trading indicator uses two lines, an up-line and a down-line. Crossing of the two lines can signal when a trend change might occur.
The Stochastic Oscillator indicates when an asset is overbought or oversold. Similar to RSI, it uses a scale from zero to 100. Analysts consider values above 80 to be overbought and below 20 to be oversold.
Bollinger Bands help answer whether an asset’s price is high or low on a relative basis. These are chart overlay bands that use a moving average and past volatility. To determine how far apart the bands are, this technical analysis tool uses standard deviation.
Fibonacci Retracements come from a pattern we often find in nature. It’s a sequence in which each number is about 1.618 times greater than the previous number. The Fibonacci sequence give us ratios of 23.6%, 38.2% and 61.8%. These are used on a price chart to determine support and resistance levels.
Average True Range measures market volatility by looking at specific time frames. It usually uses a 14-day moving average. To determine the range, it uses the greatest of a few price high and low measurements. Commodity traders initially used this signal, but traders have since successfully applied it to stocks and other assets.
Combining Trading Indicators and Minimizing Risk
As mentioned above, there are different ways to use these technical indicators. They come in many flavors, and combining them can further improve trading returns. For example, traders sometimes use both RSI and MACD to reinforce their trading decisions.
One common theme you’ll also find throughout trading is support and resistance levels. And to see these levels, there are many chart overlays available. When an asset’s price breaks past either its support or resistance level, that can be a good buying or selling opportunity.
When it comes to trading, it’s also vital to consider risk. Many successful traders have found better ways to measure both potential risk and potential reward. They then use systems to reduce emotional trading and improve their returns.
Many of the indicators above can help with creating hard trading rules. Knowing when to enter and exit a trade is no easy task. and it’s easy to get carried away. But to prevent that, many traders use stop losses. Once a position hits a predetermined price, they exit the trade with no questions asked. This helps them stick to and better test their strategies.