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Introduction To Trading Indicators

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When you venture into the financial markets, having a trading strategy is a sure way to create a foundation for successful trades. The trading strategy has several components among them the trading tools. The tools seek to streamline how you trade by making the whole experience simple and convenient. One set of tools that play this role effectively are the trading indicators.

What Are Trading Indicators?

Trading indicators are derivatives from technical analysis constituting mathematical calculations that help in forecasting future price movements of a given trading instrument. The forecasting part is essential for any investment such as the ones you have in the financial markets. This is so because they show you the possible direction of the market and help you make the right decision when executing your trades.

In trading, the indicator factors in essentials such as price, time and trading volume. They are suitable for short term trading stints showing the changes in the prices in the given duration. You can, however, also use them well in long term trading stints where you can get a rough idea of the price movement in a given time expressed as an average to guide you.

There are two types of indicators, the overlays, and oscillators. The overlays use the same scale as the price plotted while oscillators move between a minimum and maximum limit on the price chart.

Examples Of Trading Indicators

There are several trading indicators when trading and below are some good examples.

  1. Moving Averages

Moving average is a lagging indicator as it focuses on past prices to determine price movement. The lag usually refers to the number of days taken into account for the last trading period. For a short term trading strategy, you can use a short lag and for a long term use longer lags to give you a hint of price action.

They also help you take note of trends where a rising value indicates rising trends same to dropping value. There are two types of moving average figures the simple moving average and the exponential moving averages. Simple moving averages considers the past trading sessions that you have your eyes on to give you the average value. The exponential moving average, on the other hand, uses a more weighed on approach to provide conclusive and more accurate findings.

The moving average is the basis of another type of indicator, the moving average convergence divergence.

  1. The Moving Average Convergence Divergence

The moving average convergence divergence indicator is an oscillating indicator that factors in two moving average figures. You calculate its value by subtracting the exponential moving averages of the long term from the short term period denoted by 26 day and 12 day periods respectively.

The result is the MACD line which is the indication of whether to buy or sell into trends. The value is most of the time displayed on a histogram to show the variance between the MACD and its signal line, which is the nine-day exponential moving average.

  1. Relative Strength Index

The relative strength index is also an oscillating indicator moving between two extremes 0 and 100. It measures price magnitudes with important figures being 70 and 30. If the indicator is above the 70 value then the market is in an overbought condition while below 30 it is in an oversold condition.

Reaching the top values of the price chart such as 90-80 and 20 and below shows how strong the trends are in the market. It is one of the popular indicators used mostly by an experienced trader to give a hint of the market.

Conclusion

For a strong trading approach, you need to have a trading indicator to show you the state of the market. This helps in deciding which path to go with. You can learn more on the use of these tools courtesy of the demo trading account or get tutorials on their use. Above are some of the common examples that you can try out.

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