Indicators are one of the most important and main tools of technical analysis. Given the positive experience of technical analysts in the use of indicators, some of them have always been of general interest to analysts.
Indicators are auxiliary diagrams in technical analysis that are drawn from the raw materials of technical analysis, ie price, time and volume and its combination with mathematical functions. In fact, simply by extracting information from price and time charts, indicators place them in specific mathematical functions that provide analysts with the output of this information process to make future decisions.
In analysis and decision making, priority is given to price charts and indicators are considered only as auxiliary charts.
It is better to explain a little more about this because it is one of the most important points that we must pay special attention to when using indicators. Consider pedestrian lanes on the floor, slowing down or even stopping as we approach them. In fact, these lines are the basis of our decisions while driving; There is also a traffic sign next to the pedestrian lanes that refers to this issue. But if pedestrian lanes are the basis of our decision-making, then why is it necessary to have a traffic sign next to it?
On some days when the weather is not good and the weather may be foggy or the road surface is not clearly visible, this sign can help us a lot.
Indicators, like the example above, are not the basis of our decision-making and only help us to make better decisions.
Types of indicators in terms of time signal
Indicators are divided into two categories in terms of time signal: leading and following (delay):
- Leading Or Oscillator: These indicators have the ability to predict trend changes and sometimes show us the return levels and the break signal earlier than the price chart.
- Lagging Or Trend Indicators: These indicators are of the delay type and are often placed on the price chart and confirm the return areas with a slight delay.
The four main categories of indicators
Indicators are divided into four main categories, each of which has its own unique characteristics.
Three of them are in the form of public indicators and one is in the form of indicators created by investment market legend Bill Williams.
- Trend indicators: These indicators are of the delay type and are usually created on the price chart and generally provide information to the analyst for analysis and decision making by averaging the price chart.
- Oscillators: As their name suggests, they are oscillators and move in a certain range. Oscillators have the ability to check the strength of the trend, and if there is a weakness in the trend, it is somewhat visible in the oscillators. Another feature of oscillators is the study of market emotions, and when collective wisdom reacts to prices, the oscillators also react to this issue and greatly help the analyst to increase the quality of his analysis.
- Volume: are a group of indicators that examine and evaluate the volume of transactions and its value. Trading volume in specific time frames has important meanings for analysts that the use of these indicators is influential in their decision making.
- Bill Williams: The Bill Williams indicator set was designed by Mr. Williams himself and optimized by his daughter. Mathematical formulas, Fibonacci and reactive numbers have been used in the design of these indicators.
Familiarity with the concept of convergence and divergence
When the price chart and indicators behave inconsistently in changes, we see divergence, and if the price chart and indicators agree, we see convergence.
If there are signs of divergence in the indicators, it indicates a weakness in the trend and this can lead to a change in the trend.
If divergence is observed in the return areas, it can increase the probability of a return and is one of the positive news for analysts who have identified that return area.
Familiarity with some popular indicators
The McDee indicator is designed by Mr. Gerald Apple, which measures the strength and acceleration of the trend. This indicator consists of two moving averages called the sucker line and the signal line, the intersection of these two lines in certain situations gives signals to analysts that can be the basis for decision making.
• Relative Strength Index (RSI):
Undoubtedly, it is one of the most widely used indicators, which predicts the strength of the trend and its direction. This indicator is in the category of oscillators and is usually used for trading strategies of buying at the lowest price (over bought) and selling at the highest price (over sold).
Moving Average (MA / EMA):
The moving average is one of the indicators following the trend because by averaging past prices, it evaluates the average price in different periods. Generally, the moving average is calculated in two simple and exponential ways, which in the exponential calculation method will give more weight to the prices closer to the end of the period.
• Parabolic SAR:
This indicator was designed by Wells Wilder to detect sudden changes in trend
Identify and identify recurring areas. Like the moving average, the parabolic star follows the trend, except that it operates more optimally in terms of time signal. This indicator is very suitable for receiving trend reversal confirmation and it is very easy to work with.
Stochastic is undoubtedly the most popular indicator among oscillators and is widely used in volatile markets such as foreign exchange and futures markets. This indicator is very suitable for quick entry and exit of the stock and the deeper the market, the better this indicator will perform.
Experience has shown that indicators have a great impact on improving the quality of analysis; Therefore, we decide to provide a complete and more detailed explanation of each of the indicators in the future. Certainly, after learning how to use the indicators, the quality of your analysis will increase significantly compared to before.