Technical Analysis - Types of Indicators

Description: Technical Analysis, Technical Studies, indicators, volume, price advance/decline, Breadth Indicators, moving average, oscillator, MACD

Over the last several decades the technical analysis has become very popular among investors. By going deeper into the intraday trading traders start to pay more and more attention to the technical indicators instead of doing the fundamental analysis. In general all technical indicators could be divided into four categories: a) price based indicators; b) volume based; c) breadth indicators; d) combined studies.

Price Based Technical Studies

Price based indicators are the most popular due to their simple calculation and interpretation. Those indicators are widely available with almost any of the online brokers, online charts and quotes providers. The example of the price based technical indicators could be "Price Moving Average", "MACD", "Relative Strength Index", "Slow and Fast Stochastics" and others. Majority of the price studies are build on the Price Moving Averages, yet some uses price bar parameters such as open, high, low, close. Still a trader should remember, what is widely available and very easy to calculate is not always the best choice and it could be dangerous for a portfolio to rely solely on the simple price based indicators.

Volume Based Technical Studies

As a rule the price movement is described by change in price and by volume related to this change. The common statement that the volume precedes the price movement puts the volume into a second category of the technical studies. The same as with price studies the majority of the volume indicators are calculated from the Volume Moving Averages. Examples of such indicators could be Volume Oscillator, Percentage Volume Oscillator (PVO) and others. The volume indicators are more complex and are not as popular as price studies. In some cases they could be disordered when they are used on the rarely traded stocks. Gaps in volume (periods when stock is not traded) can move en volume indicator in wrong direction and as a result generate fake signal. This is why it is recommended to use volume studies on very active stock or on the basket of stocks (indexes). Mainly because the volume based indicators could be disordered on non-active stocks and because it's very complicated to calculate volume for the indexes in real time the volume technical studies are not as popular as price based technical indicators and you may count on finger providers of the volume based indicators. Still the same as with price studies, it could be wrong to rely only on volume. When analyzing volume it is recommended at least to keep an eye on the Price Moving Average.

Breadth Indicators

Breadth or Advance/Decline indicators are one of the major tools in analyzing the indexes and exchanges. These indicators could be applied only to the basket of stocks and cannot be used on a single stock. That is one of the reasons why stock traders rarely use these technical studies, yet they are considered one of the best in defining the trend reversal. These studies are based on the number and volume of stocks from the basket of stocks that are moving up or down, and are making new highs or new lows. The examples of these indicators could be Advance/Decline Line, Advance/Decline Oscillator, TRIN, McClellan Oscillator, New Highs/Lows oscillator and others. These indicators could be considered as combined indicators since they use some price comparison (they define where the price heading) and some volume characteristics (such as number of stocks and volume of stocks). Despite the fact that Breadth indicators are considered as good predictors they are not very popular doe to the limited number of these indicators providers. Due to the complex calculation, there are only a few Breadth Indicator providers for indexes and exchanges.

Volume/Price Based Technical Studies (combined indicators).

As was mentioned above volume precedes price movement and this principle has been put into the core of the volume and price based technical indicators. Such studies as OBV (On Balance Volume), Accumulation/Distribution Line, MFI (Money Flow Index) and other uses elements of the price analysis in combination with volume to define the whether we have positive or negative (in the security or out of the security) money flow (volume) in order to highlight volume surges (increase in volume) that may lead to the trend reversal. In opposite to the pure volume based indicators, very often combined indicators are build on cumulative principles and because of that gaps in volume do not affect these indicators.

There are many indicators are developed in the technical analysis. Many of them repeat each other with difference only in the presentation of the final numbers (as absolute or percentage value for instance). It is not necessary to learn all of them in order to become a professional in technical analysis. Yet, it's strongly not recommended to use only one of them as well. It is common practice to have several technical indicators in the arsenal. The good result could be achieved when a trader uses indicators from different group of technical analysis and it is always better when a trader analyzes one price based and one volume based indicator instead of 10 pure prices based studies.

 

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