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Indicators in Technical Analysis

Article Submitted by: Viktor Ko

Thursday, 18 December 2008

Technical analysis has been developed into the complicated science that is in the constant research and development. Started more than hundred years ago with introduction of DOW indexes now technical analysis covers indexes that track different markets, technical indicators that describe various price and volume behaviour, analysis of volatility, trading sentiment, psychology of traders, developing of trading strategies and building trading systems. If hundred years ago traders used only DOW indexes to analyze the market and see the general market trend, now, with revolution in the information technology we have hundreds of technical studies to analyze market. In the current moment, the most often risen question is developing of a trading system based on the several technical indicators - trading system that would allow automating process of making trading decision and excluding emotional factor from the trading.

Using several indicators has been always challenging process for many traders. The first question that many investors ask is how many and what technical studies should be used in the market analysis. There is no straight answer on this question. The indicators selection depends on many factors where the trader's personal trading style and knowledge of the market could be first in the line. However, there could be general reasonable recommendation that could be used by everybody:

1. Use those technical indicators that you are familiar with and have practice in using. If you novice trader then you may start from the simple one and then move to the more complicated. Price moving average and volume moving average are two basic indicators that are used as a foundation in many other more complex technical studies.

2. Security trend is always described by a change in the security's price and traded volume (number of security's shares) during this price change. Therefore it would be logical to have in the arsenal at least one technical indicator based on the price and one that describes volume. As one of the rules in technical analysis states "there is no price change without volume and there is no volume without price movement".

3. It could be useful to keep an eye on the security and market volatility. Professional analysts know that the market behaves differently in Bull and Bear market, that resistance point differ from the support point and that depending on the volatility different indicators setting could be used and trading system should always be adjusted accordingly in order to react on the trend reversal when it's not too early yet and when it's not already too late. Depending on your knowledge and data access you may use VIX (volatility index based on the S&P 500 options), ATR (Average True Range) or any other volatility indicators.

Those are three basic rules that could be recommended to any trader, especially to a trader who is making first steps in the technical analysis.

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You may have access to the various technical studies, stock charts and quotes, including advance decline data for S&P 500, DJI and Nasdaq 100 indexes at MarketVolume web site.

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