The calculations based on volume and price of a security used to measure things like money flow, volatility, momentum and trends are known as Indicators. They are used as secondary measure for calculating actual price movements as well as for adding any extra information with the security analysis.
They are mainly used in for two purposes:
• To sell and buy signals
• To confirm the price movement and chart pattern quality.
In technical analysis, indicators are of two kinds, leading and lagging. The leading indicator gives a predictive quality as it precedes the price movement. On the flip side, lagging indicator follows the price movement, and is thus a confirmation tool. Leading indicators are strongest during the non trending trading range or sideways range. Alternatively, lagging indicators are used during the trending periods.
Indicators can be constructed in two different ways: one which falls within a bounded range, known as oscillators, and other which does not fall within a specific range. Oscillators are the most commonly used indicators. They have a specific range, for instance between 0 and 100 as well as periods of signal where securities are oversold (near 0) or overbought (near 100). Though non bounded indicators also form sell and buy signals, but they do it in a varied fashion.
There are two major indicators which are used for buying and selling signals in the process of technical analysis. These are:
• Crossovers: They are the most popular indicators and are indicated with the movement of price through moving average, or with the crossing over of two diverse moving averages.
• Divergence: Divergence is said to occur when direction of price trend moves in the opposite direction of the indicator trend. This tells the users of the indicators about the weakening of price trend.
The technical analysis indicators provide an immensely useful source for getting extra information. These indicators help in identifying trends, volatility, momentums, and other aspects of security which can help in technical analysis of different trends.
Some of the commonly used indicators include:
The distribution / accumulation line is the most popular volume indicators. It is used to measure the flow of money in a security. It measures the ratio of selling with buying by comparing its price movement with volume of a particular period of time. The distribution line is a non-bound indicator which maintains a running sum over a period of security. A security will an upward distribution / accumulation line means there is less selling and more buying.
Aroon indicator has been recently introduced as a technical indictor in 1995. It is one of the trending indicators which determine whether a particular security is downtrend or uptrend. It also measures the magnitude of the trend as well as predicts the beginning of a new trend.
Average Directional Index
ADX is a trend indicator which is used for measuring the strength of a trend. It is used for identifying the momentum behind the trends, but not for calculating its strength. It is actually a combination of 2 different price measures, namely positive and negative directional indicators.
On balance volume is a technical indicator which depicts the movement in volume. It is quite easy to understand and calculate. It can be calculated by assigning a negative or positive value to trading period and then observing whether the value is escalating or descending.