W. D. Gann once pointed out that more than 90% of traders who enter the market without preparation or sufficient knowledge often face significant losses.
A key tool for deciding when to enter or exit trades is the use of Technical Indicators. These indicators help predict stock market movements to increase profit potential and minimize risks. Simply put, they’re charts that show market or price patterns. When interpreted correctly, they can tell you whether market prices might go up or down and if stocks are overvalued or undervalued. These charts are based on various data points calculated using a formula applied to an instrument’s price details, with the basic type being price/volume indicators.
Technical Indicators offer new insights into understanding price movements of instruments. Some, like MOVING AVERAGES, are simple, while others, like STOCHASTICS, are based on more complex formulas. Generally, it’s recommended to follow two or three compatible indicators when analyzing the stock market. Brokerage firms provide charting tools for technical analysis, and resources are available to help you choose a broker and learn about forex trading.
There are two main types of Technical Indicators:
1. Leading Indicators: These track price fluctuations and generate buy or sell signals. They present more trading opportunities but come with an element of risk. Common leading indicators include:
– Commodity Channel Index (CCI)
– Momentum
– Relative Strength Index (RSI)
– Stochastic Oscillator
– Williams %R
Leading Indicators offer early warnings for entry or exit points but can sometimes give inaccurate signals, increasing trading risks.
2. Lagging Indicators: Also known as Trend Following Indicators, these track price changes retrospectively. While their signals might come later and increase the risk, their main advantage is the ability to capture and stay in a move for its duration. Examples include:
– Moving Averages
– MACD – Moving Average Convergence Divergence
In conclusion, balancing the use of Technical Indicators is crucial. Quick-reacting indicators might provide early market signals but also carry the risk of false signals. It’s recommended to use complementary indicators to minimize these risks and enhance trading decisions.
About the author: Punit Gupta is an entrepreneur and full-time stock trader. With a talent for building startups from the ground up, he is currently developing a brokerage selection platform called Best Trading Brokerage. Punit studied at the Georgia Institute of Technology in Atlanta and worked with a startup for seven years before launching his own venture.