7 Technical Indicators (part2)

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12 Feb 2024
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4. Aroon Indicator

The Aroon oscillator is a technical indicator used to measure whether a security is in a trend, and more specifically if the price is hitting new highs or lows over the calculation period—typically 25.4
The indicator can also be used to identify when a new trend is set to begin. The Aroon indicator comprises two lines: an Aroon Up line and an Aroon Down line.
When the Aroon Up crosses above the Aroon Down, that is the first sign of a possible trend change. If the Aroon Up hits 100 and stays relatively close to that level while the Aroon Down stays near zero, that is positive confirmation of an uptrend.
The reverse is also true. If Aroon Down crosses above Aroon Up and stays near 100, this indicates that the downtrend is in force.

 Always make sure you practice with a trading demo account before you decide to use your own capital. This ensures that you understand how technical analysis (or any other strategy you decide to take) can be applied to real-life trading.

5. MACD

The moving average convergence divergence indicator helps traders see the trend direction, as well as the momentum of that trend. It also provides a number of trade signals. When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period.5
The indicator is composed of two lines: the MACD line and a signal line, which moves slower. When MACD crosses below the signal line, it indicates that the price is falling. When the MACD line crosses above the signal line, the price is rising.
Looking at which side of zero the indicator is on aids in determining which signals to follow. For example, if the indicator is above zero, watch for the MACD to cross above the signal line to buy. If the MACD is below zero, the MACD crossing below the signal line may provide the signal for a possible short trade.

6. Relative Strength Index

The relative strength index has at least three major uses. The indicator moves between zero and 100, plotting recent price gains versus recent price losses. The RSI levels therefore help in gauging momentum and trend strength. 
The most basic use of an RSI is as an overbought and oversold indicator. When the RSI moves above 70, the asset is considered overbought and could decline. When the RSI is below 30, the asset is oversold and could rally. However, making this assumption is dangerous; therefore, some traders wait for the indicator to rise above 70 and then drop below before selling, or drop below 30 and then rise back above before buying.6
Charles Schwab. "How to Use the Relative Strength Index (RSI)."
Divergence is another use of the RSI. When the indicator is moving in a different direction than the price, it shows that the current price trend is weakening and could soon reverse.
A third use for the RSI is support and resistance levels. During uptrends, a stock will often hold above the 30 level and frequently reach 70 or above. When a stock is in a downtrend, the RSI will typically hold below 70 and frequently reach 30 or below.

7. Stochastic Oscillator

The stochastic oscillator measures the current price relative to the price range over a number of periods. Plotted between zero and 100, the idea is that the price should make new highs when the trend is up. In a downtrend, the price tends to make new lows. The stochastic tracks whether this is happening.7
The stochastic moves up and down relatively quickly as it is rare for the price to make continual highs, keeping the stochastic near 100, or continual lows, keeping the stochastic near zero. Therefore, the stochastic is often used as an overbought and oversold indicator. Values above 80 are considered overbought, while levels below 20 are considered oversold.
Consider the overall price trend when using overbought and oversold levels. For example, during an uptrend, when the indicator drops below 20 and rises back above it, that is a possible buy signal. But rallies above 80 are less consequential because we expect to see the indicator move to 80 and above regularly during an uptrend. During a downtrend, look for the indicator to move above 80 and then drop back below to signal a possible short trade. The 20 level is less significant in a downtrend.

Is Technical Analysis Reliable?

Technical analysis is the reading of market sentiment via the use of graph patterns and signals. Various empirical studies have pointed to its effectiveness, but the range of success is varied and its accuracy remains undecided. It is best to use a suite of technical tools and indicators in tandem with other techniques like fundamental analysis to improve reliability.

Which Technical Indicator Can Best Spot Overbought/Oversold Conditions?

The relative strength index is among the most popular technical indicators for identifying overbought or oversold stocks. The RSI is bound between 0 and 100. Traditionally, a reading above 70 indicates overbought ad below 30 oversold.

How Many Technical Analysis Tools Are There?

There are several dozen technical analysis tools, including a range of indicators and chart patterns. Market technicians are always creating new tools and refining old ones.


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