Top technical indicators for novice traders

Start with the trading game? It is important to find the best technical indicators to follow the action. It affects how you interpret trends—including positions and broad averages—and the types of opportunities that arise in overnight research. Choose wisely, and you have laid a solid foundation for successful speculation. Inappropriate choice, predators will line up in a row, ready to pay for it at any time.

Key points

  • Generally speaking, technical indicators are divided into five categories: trend, mean reversion, relative strength, volume and momentum.
  • Leading indicators try to predict the direction of the price, while lagging indicators provide historical reports of the background conditions that caused the current price to be in its current position.
  • Popular technical indicators include Simple Moving Average (SMA), Exponential Moving Average (EMA), Bollinger Bands, Stochastic and Balanced Weights (OBV).

Novice trading strategy

Most novices follow suit when constructing their first trading screen, grab a bunch of preset indicators and stuff as many indicators as possible under the price bars of their favorite securities. This “more is better” approach will short-circuit the signal because it looks at the market from too many angles at the same time. Ironically, indicators are most effective when simplifying analysis-removing noise and providing usable output based on trend, momentum, and timing.

Instead, take a different approach by breaking down the types of information you want to focus on during the market day, week, or month. In fact, almost all technical indicators can be classified into five types of research. Each category can be further subdivided into leading or trailing. Leading indicators try to predict the direction of the price, while lagging indicators provide historical reports of the background conditions that caused the current price to be in its current position.

  • Trend indicators (lagging) analyze whether the market moves up, down, or sideways over time.
  • The mean reversion indicator (lagging) measures how far the price volatility will extend before the kickback triggers a retracement.
  • The relative strength indicator (leading) measures fluctuations in buying and selling pressure.
  • The momentum indicator (leading) assesses the speed of price changes over time.
  • Trading volume indicators (leading or lagging) count transactions and quantify whether a bull or a bear market is under control.

So, how do beginners choose the correct settings at the beginning and avoid months of invalid signals? In most cases, the best approach is to start with the most popular number—and adjust an indicator—and then see if the output helps or hurts your performance. Using this method, you will quickly grasp the specific needs of your level.

Now that you understand the five ways indicators can analyze market behavior, let us determine the best indicators in each category for novice traders.

Trend indicator

50-day EMA and 200-day EMA


We will start with two indicators embedded in the same panel as the daily, weekly or intraday price bars. The moving average looks back on the price trend in a specific time period and subdivides the total to create a moving average that is updated with each new bar. The 50-day and 200-day Exponential Moving Average (EMA) is a more responsive version of its more well-known simple moving average (SMA). In short, the 50-day EMA is used to measure the average median price of a security, while the 200-day EMA measures the average long-term price.

The 50-day and 200-day EMA of the United States Petroleum Fund (USO) rose steadily to the summer of 2014, while the instrument rose to a 9-month high. The 50-day EMA turned lower in August, and the 200-day EMA also fell a month later. Then the short-term average crosses the long-term average (represented by the red circle), indicating that the trend has undergone a bearish change before the historical collapse.

Mean Reversion Index

Bollinger Bands

USO’s impulse to buy and sell extends to seemingly hidden levels, forcing a counter wave or retracement to start. Bollinger Bands (20, 2) try to determine these turning points by measuring how far the price can move from the central trend fulcrum (in this case, the 20-day moving average), and then trigger the impulse to return to the mean.

These bands will also shrink and expand with volatility. When this hidden power is no longer an obstacle to rapid price fluctuations, it will be shown to keen traders.

Relative Strength Index

Stochastic indicator


Market trends evolve through buying and selling cycles, which can be identified by stochastic indicators (14,7,3) and other relative strength indicators. These cycles usually peak at overbought or oversold levels, then move in the opposite direction and the two indicator lines cross. As you might expect, cycle alternation does not automatically translate into higher or lower security prices. Conversely, a bullish or bearish shift indicates a period when buyers and sellers control the stock market. Volume, momentum, and other market forces are still needed to generate price changes.

SPDR S&P Trust (SPY) fluctuated through a series of trading cycles within 5 months. Look for signals in the following locations:

  1. The crossover has occurred at or near the overbought or oversold level
  2. The indicator line is then pushed to the center of the panel.

This two-level confirmation is necessary because the stochastic indicator can oscillate near extreme levels for a long time in a strongly trending market. And, although 14, 7, and 3 are perfect settings for novice traders, please consider trying to find the best setting for the tool you are analyzing. For example, experienced traders will switch to faster 5, 3, and 3 inputs.

Momentum indicator

MACD


The Moving Average Convergence Divergence (MACD) indicator is set to 12, 26, 9, and provides a powerful tool for novice traders to check rapid price changes. This classic momentum tool measures the speed of movement of a particular market as it tries to determine a natural turning point. When the histogram reaches its peak and reverses its course to cross the zero line, the buy or sell signal disappears. The height or depth of the histogram, as well as the speed of change, all interact to generate a variety of useful market data.

SPY showed four significant MACD signals in 5 months. The first signal marks a decrease in momentum, while the second signal captures the directional thrust that unfolds immediately after the signal disappears. The third signal looks like a false reading, but accurately predicts the end of the buying impulse from February to March. When the histogram fails to penetrate the zero line, the fourth triggers an obvious wash.

Volume indicator

Balance (OBV)


Keep the volume histogram under your price bar to check the current level of interest in a particular security or market. Over time, the slope of participation reveals new trends—usually before the price pattern completes a breakout or collapse. You can also place the 50-day average trading volume on the indicator to see how the current session compares with historical activity.

Now add the balance volume (OBV), which is a cumulative distribution indicator, to complete your snapshot of the transaction flow. This indicator adds up buying and selling activities to determine whether the bulls or the bears have won the battle for higher or lower prices. You can draw trend lines on OBV and track the sequence of highs and lows. It is very effective as a convergence-divergence tool. For example, between January and April, when prices hit higher highs and OBV hits lower highs, Bank of America (BAC) proved this, indicating that there was a bearish divergence before the sharp decline.

Bottom line

Choosing the right technical indicators is a difficult task, but if novice traders focus their impact on five types of market research, they can be managed: trend, mean reversion, relative strength, momentum, and trading volume. Once they have added effective indicators for each category, they can begin a long but satisfying process of adjusting inputs to match their trading style and risk tolerance.

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