Technical Indicator

What Is a Technical Indicator?

A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced.

For example, the average of 3 closing prices is one data point ( (41+43+43) / 3 = 42.33 ). However, one data point does not offer much information and does not an indicator make. A series of data points over a period of time is required to create valid reference points to enable analysis. By creating a time series of data points, a comparison can be made between present and past levels. For analysis purposes, technical indicators are usually shown in a graphical form above or below a security’s price chart. Once shown in graphical form, 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.

What Does a Technical Indicator Offer?

A technical indicator offers a different perspective from which to analyze the price action. Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand. Others, such as Stochastics, have complex formulas and require more study to fully understand and appreciate. Regardless of the complexity of the formula, technical indicators can provide unique perspective on the strength and direction of the underlying price action.

A simple moving average is an indicator that calculates the average price of a security over a specified number of periods. If a security is exceptionally volatile, then a moving average will help to smooth the data. A moving average filters out random noise and offers a smoother perspective of the price action. Veritas (VRTS) displays a lot of volatility and an analyst may have difficulty discerning a trend. By applying a 10-day simple moving average to the price action, random fluctuations are smoothed to make it easier to identify a trend.

Why Use Indicators?

Indicators serve three broad functions: to alert, to confirm and to predict.

  • An indicator can act as an alert to study price action a little more closely. If momentum is waning, it may be a signal to watch for a break of support. Or, if there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout.
  • Indicators can be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Or, if a stock breaks support, a corresponding low in the On-Balance-Volume (OBV) could serve to confirm the weakness.
  • Some investors and traders use indicators to predict the direction of future prices.

Overlays

  • Bollinger Bands – A chart overlay that shows the upper and lower limits of ‘normal’ price movements based on the Standard Deviation of prices.
  • Ichimoku Clouds – A comprehensive indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals.
  • Keltner Channels – A chart overlay that shows upper and lower limits for price movements based on the Average True Range of prices.
  • Moving Averages – Simple and Exponential – Chart overlays that show the ‘average’ value over time. Both Simple Moving Averages (SMAs) and Exponential Moving Averages (EMAs) are explained.
  • Moving Average Envelopes – A chart overlay consisting of a channel formed from simple moving averages.
  • Parabolic SAR- A chart overlay that shows reversal points below prices in an uptrend and above prices in a downtrend.
  • Pivot Points- A chart overlay that shows reversal points below prices in an uptrend and above prices in a downtrend.
  • Price Channels – A chart overlay that shows a channel made from the highest high and lowest low for a given period of time.
  • Volume by Price – A chart overlay with a horizontal histogram showing the amount of activity at various price levels.
  • Volume-weighted Average Price (VWAP) – An intraday indicator based on total dollar value of all trades for the current day divided by the total trading volume for the current day.
  • ZigZag – A chart overlay that shows filtered price movements that are greater than a given percentage.

Indicators

  • Accumulation Distribution Line – Combines price and volume to show how money may be flowing into or out of a stock.
  • Aroon – Shows whether a stock is trending or oscillating.
  • Average Directional Index (ADX) – Shows whether a stock is trending or oscillating.
  • Average True Range (ATR) – Measures a stock’s volatility.
  • Bollinger Bands %B – Shows the relationship between price and Bollinger Bands.
  • Bollinger BandWidth – Shows the distance between the upper band and the lower band. .
  • Commodity Channel Index (CCI) – Shows a stock’s variation from its ‘typical’ price.
  • Correlation Coefficient – Shows the degree of correlation between two securities over a given time frame.
  • Chaikin Money Flow – Combines price and volume to show how money may be flowing into or out of a stock. Alternative to Accumulation/Distribution Line.
  • Chaikin Oscillator – Combines price and volume to show how money may be flowing into or out of a stock. Based on Accumulation/Distribution Line.
  • Detrended Price Oscillator (DPO) – A price oscillator that uses a displaced moving average to identify cycles.
  • Force Index – A simple price-and-volume oscillator.
  • MACD – A momentum oscillator based on the difference between two EMAs.
  • MACD-Histogram – A momentum oscillator that shows the difference between MACD and its signal line.
  • Money Flow Index (MFI) – A volume-weighted version of RSI that shows shifts is buying and selling pressure.
  • On Balance Volume (OBV) – Combines price and volume in a very simple way to show how money may be flowing into or out of a stock.
  • Percentage Price Oscillator (PPO) – A percentage-based version of the MACD indicator.
  • Percentage Volume Oscillator – The PPO indicator applied to volume instead of price.
  • Price Relative – Technical indicator that compares the performance of two stocks to each other by dividing their price data.
  • Rate of Change (ROC) – Shows the speed at which a stock’s price is changing.
  • Relative Strength Index (RSI) – Shows how strongly a stock is moving in its current direction.
  • StockCharts Technical Rank (SCTR) – Provides a technical rank based on six technical indicators. Can be use to find stocks showing relative strength or avoid stocks showing relative weakness.
  • Slope – Measures the rise-over-run for a linear regression
  • Standard Deviation (Volatility) – A statistical measure of a stock’s volatility.
  • Stochastic Oscillator – Shows how a stock’s price is doing relative to past movements. Fast, Slow and Full Stochastics are explained.
  • StochRSI – Combines Stochastics with the RSI indicator. Helps you see RSI changes more clearly.
  • TRIX – A triple-smoothed moving average of price movements.
  • Ultimate Oscillator – Combines long-term, mid-term and short-term moving averages into one number.
  • William %R – Uses Stochastics to determine overbought and oversold levels.

Market Indicators

  • Introduction to Market Indicators – An in-depth introduction to popular market indicators found on StockCharts.com.
  • Arms Index (TRIN) – A breadth indicator derived from the AD Ratio and AD Volume Ratio.
  • Advance-Decline Line – A cumulative breadth indicator derived from Net Advances.
  • Advance-Decline Volume Line – A cumulative breadth indicator derived from Net Advancing Volume.
  • Bullish Percent Index – A breadth indicator derived from the percentage of stocks on PnF buy signals.
  • The High-Low Index – The 10-day moving average of the Record High Percent Index, a breadth indicator (see below).
  • McClellan Oscillator – A MACD type oscillator of Net Advances.
  • McClellan Summation Index – A cumulative indicator based on the McClellan Oscillator.
  • Net New Highs – A breadth indicator showing the difference between new highs and new lows. Percentage, cumulative and smoothed versions can be used.
  • Percent Above Moving Average – A breadth oscillator that measure the percentage of stocks above a specific moving average.
  • Put/Call Ratio – A sentiment indicator found by dividing put volume by call volume.
  • Record High Percent Index – A breadth indicator that shows new highs as a percentage of new highs plus new lows.
  • Volatility Indices – Indicators of implied volatility designed to measure fear and complacency for a range of indices and ETFs.

 

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