Top 3 Technical Indicators

Technical indicators are great tools to use when it comes to accurately deduce the trend of an asset's price. Many advanced traders and investors are usual adepts of this medium, which increases their winning chances. Here are 3 top technical tools, chosen by the team at BigOption for you. Enhance your trading.

The fast pace of financial markets has taken over the global trading market. Looking for trading opportunities, using chart patterns and technical tools are recommended. A combination of technical indicators and different charting styles is best suited for advanced traders.

Existing simple technical indicators

Overall, there are a variety of technical indicators which can provide useful signals, matching the needs of advanced traders. Technical indicators are mostly used as signal providers and are based on the price and/or volume. However, additional information is also recommended, so as to keep track of what is brewing up in the market globally.

Some examples of indicators are:

Momentum

• Strength of a current trend.

Trends

• The current direction at which prices trade. The trend could be bearish/ bullish / sideways.

Reversals

• Signals a reversal in price trend.

Divergence

• Price of a financial market and an indicator moves in an opposite direction.

Let's have a deeper analysis of 3 top technical tools


Moving Average

Add the closing price of a given asset for a number of time periods and divide the total that you get by the number of time periods. Am sure you are now lost in calculations? Or see this as very ambiguous? I understand you but rest assured, I am here to help you out. Remember that moving average is a tool that traders and technical analysts use to analyze price movement of assets.

Example 1: Moving Average

Traders deem this tool as the most simple and accurate way to measure overall trends and cycles. This method is also a good medium of generating signals to place a CALL or PUT option. However there are two types of moving average adopted by most traders.

SMA - Simple Moving Average


EMA - Exponential Moving Average

Simple moving average is simply the mean of the data points on a provided chart. Remember mean, mode and median in Mathematics? Well, if you don't, nevermind.

Mean - Measuring the central tendency of a distribution of points and/or depending on the context of the chart.

Example 2: Mean

In the case of a simple moving average, you need to verify the trend of a particular stock as shown in the diagram below.

Example 3: Moving Average

Say for example: The total for 30 days is 1000

Take the total / 30 = mean
1000 / 30 = 33.3 (Mean)

Note that every time a new price is added, the moving average moves forward.

EMA - Exponential Moving Average

The difference in exponential moving average is quite considerable but bears almost the same resemblance to the SMA. In exponential moving average, analysts take the most recent price data into consideration. However, the calculation of the mean time remains the same. More importance is given to recent data and in the EMA, the moving average line inclines more towards recent data.

The SMA and EMA are excellent signal providers to place a CALL or PUT option. On an exponential moving average, the part over a moving average line, signals a call whereas the part below the moving average line, signals a PUT option. However on an EMA, since more concentration lies in recent data, wrong signals are common. Therefore, it is wise for investors to use both the EMA and SMA in combination on the same chart.

Support levels on a chart become more significant when the number of time periods used in calculations increase. At this point, there is a good chance of the asset to bounce back. After a pullback on a chart, support levels are important to decipher the next movement.

Important to note:

• Support level: Test of an asset, when prices fall sharply towards a certain level


• Pullback: Brief reversal of an upward trend


MACD (Moving Average Convergence Divergence)

This technical indicator's main purpose is to show the difference between short-term and long-term price trends. This is done mainly to anticipate future movements .

Start looking for trends from the 12th day of the Exponential moving average (EMA) and subtract 26 days of EMA from it. Furthermore, plot a 9-day signal line over the MACD line - once you create the chart look for crossovers.

Example 4: MACD chart

Crossovers

The chart above shows the MACD and signal line: When the MACD is above the signal line, this signals a bullish trend, whereas when the MACD is below the signal line, the chart is bearish. A super uptrend of the MACD over the signal line depicts an overbought market which signals divergence.

Divergence

The actual price diverges from the MACD and can also be interpreted at the end of the current trend.

Dramatic rise

As explained, at this point the chart signals an overbought market. The MACD rises dramatically and depicts the shorter moving average pulling away from the long-term moving average.

Parabolic SAR

Developed by the famous technician, Welles Wilder who is also the creator of the relative strength index, this technical indicator proved to be super useful for traders. This indicator uses "dots" placed on a given chart of an asset, known as the trailing stop and reverse method called SAR. A stop and reversal trend here is mainly to determine the right exit and entry points to place a particular trade. This strategy is also very useful to determine short-term and long-term momentum. Future short-term momentum of an asset is most importantly determined through this strategy.

• Momentum: A momentum defines the moment when a particular asset starts taking a specific upward trend and moves in the same direction for some time.

Image 5 : Parabolic SAR

All the dots on the chart are equally important to signal the current trend of an asset. A series of dots are placed either above or below the chart price. Dots placed below the price trends signal an upward trend whereas dots placed above the trend shows a downward trend.

Simply place a PUT option when you see the dots above the price candles and a CALL when the dots are below the prices. Here you have to verify the trend, not the recent candlestick showing the current price. If you want to predict a short-term or long-term momentum of a particular chart, start by using this indicator on your charts and follow the instructions I gave. Also, you may want to conduct further research concerning the same.

The Bottom line

Take charge of your trading experience! Be it simple trading, trading for an experience or trading for a living, just remember, these technical indicators are of great importance. Use them to your own advantage.

Warren Tancredi By: Warren Tancredi
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