12 Reasons You Should Invest Using Technical Indicators

This article helps you see the pros associated with the use of Technical Indicators in Stock Market Trading. Most of us have heard the words and have also may be used them during our tryst with trading.

The article goes deeper into the reasons as to why as an aspiring trader or an experienced one, we must realize the usefulness associated with Technical Indicators. As the name suggests, they form a part of the larger umbrella of trading approaches in Stock Market Trading – Technical Analysis

Technical analysis is one of the most sought after trading approach today. In spite of traders seldom believing it to be a non-scientific approach, technical analysis is still considered to be quite a popular approach amongst many. It is mostly used for price forecasting and to fathom trend movements.

Technical analysis also provides recommendations for when to invest in the stock market and when to exit it.  Technical analysis best serves its purpose due to its meticulous indicators and oscillators. These indicators and oscillators are what help you execute your strategies. They identify the crowd psychology through the patterns and other such graphical representations.

Technical indicators base their functioning on the logic that studying historical data is of foremost importance as they provide an insight into how the market might change in the future. Keeping this logic in mind, how many new-age investors believe in this logic is debatable. Nonetheless, hardly any traders would be of the opinion that the technical indicator has proven to be quite a helpful tool.

There are several technical indicators available to traders today – some useful only to seasoned traders while others can be used by beginners as well. This differentiation is mainly due to the fact that the functioning of each of these technical indicators are rooted in their mathematical framework – each of them follow a specific pattern of usage and it is important to research on them before using them.

There are some technical indicators which are easy to use and do not come bearing several complex mathematical technicalities.

These indicators are also used for charting, pattern-reading and many such graphical representations.

technical indicator are useful for charting, pattern-reading and graphical representation

Nevertheless, let’s look at some of these technical indicators and oscillators that have proven to be quite helpful to traders around the world:-

  • Average Directional Index (ADI)
  • Accumulation/Distribution Line
  • Aroon
  • Aroon Oscillator
  • Moving Average Convergence (MACD)
  • Relative Strength Index
  • On-balance volume
  • Stochastic Oscillator
  • Stochastic Indicator
  • Bollinger Bands
  • Eliott’s Waves

Now, why must you invest using these indicators?

Through the course of this write up, we will tell you how to use these technical indicators to stand out in the art of stock market trading!

Trading is by itself a difficult task which requires a lot of learning – so this post will provides you with a list of reasons as to why the use of technical indicators makes your trading experience a lot smoother.

So, below is a list of 12 pointers to invest using technical indicators:-

  • With the Accumulation/Distribution Line, you can measure the ratio of buying to selling by differentiating the price movement of a period along with the volume of the same period. This also means that the indicator is used to find out whether the money is flowing into or out of the commodity you are trading with! This indicator also provides an insight on the quantity of purchasing as compared to the selling of a financial instrument.
  • Technical indicators like the MACD helps to calculate the comparative difference between two moving average of the prices. It also measures the momentum of the price movement and signals the current direction of the momentum by measuring the difference between the short-term and the long-term momentums.
  • Technical indicators also signal overbought and oversold conditions in any financial instrument (security). This feature also helps to know whether the price of a stock has been pushed to current levels beyond extremities and whether there is a chance for a reversal in price. The RSI indicator is best used for these purposes.
  • There are several volume indicators amongst the technical indicators available to traders today. These volume indicators help to find out the movements in volume.
  • Technical indicators like Stochastic Oscillators are used for calculating momentum but along with this feature they also show the uptrend, downtrend and the graphical topography of price movements in the market.
  • Technical indicators like Aroon oscillators are used to forecast trend reversals in the market. Though there are several indicators available to us today to find out about the uptrends and downtrends, it is an absolute necessity to know about when a trend might fall back in reverse. The Aroon indicator on the other hand is used to know when a trend might begin and the magnitude of the trend is also shown along with its movements. These two indicators are a must have’s for all traders around the world!

AROON OSCILLATORS – technical indicator to shows uptrend and downtrends

  • Technical indicators help in entry and exit recommendations for the stock market. This is usually with the help of certain trend indicators and other indicators which help in reading patterns, volume, and moving averages. It is very important for a trader to know when to enter the market and when he must exist to not incur losses. There is a tool known as trend resistance which helps to determine the target level as well, making it easier for a trader to know about entry and exit signals.
  • Another important feature associated with technical analysis is the study of charts. Technical analysts are also known as chartists for their intricate use of charts and graphs. These charts contain several patterns and numerological references which require a great amount of research to be fathomed. Technical indicators like Elliott’s waves or a Gap chart, help to know about entry and exit points along with a signal for future selling of stocks.
  • Daily Forex traders rely heavily upon the use of Technical indicators; this is majorly due to the high success rate associated with them in the area of Forex trading. They form highly meaningful signals for Forex trading.
  • All technical indicators are based on the logic of mathematical calculations that originate from the study of past data – this is exactly the basis of technical analysis as well. Technical analysis believes that studying the historical data of stock movements which repeat themselves over the years helps to predict future stock movements.
  • A lot of institutional investors and hedge fund managers use technical indicators to forecast stock market movements. The institutional investors use technical indicators like Ichimoku Cloud (a charting tool) which helps in figuring out the buy and sell signals. Therefore, we see how the use of technical indicators is not restricted but offers a wide purview.
  • An indicator cannot be confused with a trading strategy – it is a tool which helps traders understand the market conditions. One of the most vital features of a technical indicator is to measure volatility of the market. Before we get down to the uses, what is volatility? Volatility refers to the amount of risk associated with the magnitude of changes in a security’s price. The higher the volume, the more potential it contains to spread out over larger range of values. It also indicates that the price of a security can drastically change over a period of time. The technical indicators, thus, help us understand when the changes might take place, how the prices can fluctuate and how this would affect our stocks.
what technical indicators actually do

These reasons can all be summed up to safely come to the conclusion that technical indicators basically forecast the stock price movements.

Along with this feature, there are several other technicalities it covers that affect the way we deal with our stocks. Each of these indicators signals a change, a precise time to buy or sell and to know when to except losses. These are the main things one usually seeks help for in the stock market.

The choice of indicators depends on your choice of market strategy and the approach you wish to work with. It also depends on your style of trading and risk-tolerance.

Technical indicators take your strategy a step ahead and show you how they might pan out in the future. This peak into the future is a necessity associated with stock market trading. An already risk-encumbered zone to be dealing with, without helping tools like technical indicators, the stock market would seem anarchic!

Therefore, the secret behind how to get rid of your fears and how to generate more profits in the future, is to remember that there are several such technical indicators available in the market that are designed to suit your needs – to foresee where each of your choices will lead you to, a prosperous trading fortune or an abyss of eventual loss?

We hope you find this article to be of great use and do share your views, leave your comments on the advantages of using technical indicators as part of your trading expedition.