October 29, 2007
What Are The Different Types Of Technical Indicators?
If you open up any charting package and attempt to put some form of technical indicator alongside the price, you will usually be presented with endless different technical indicators to assist you with your trading.
This can be slightly overwhelming when you first start using technical analysis, because you don't know which indicators are best, what information they are conveying, or how to interpret the data. So in today's article I'm going to briefly discuss the different types of technical indicators available to you.
There are basically four different types of technical indicators:
1. Trend indicators.
These indicators are used to indicate the direction of a trend. These are very useful because the basic rule is that you should always trade with a trend and not against it. Some examples of trend following indicators include Parabolic SAR, MACD and Moving Averages.
2. Momentum indicators.
Momentum or strength indicators are used to indicate the speed or strength of a move in price and are best used to determine a change in direction. They tend to be oscillating indicators showing overbought and oversold positions. Examples include CCI, RSI and Stochastics.
3. Volatility indicators.
These indicators, as the name suggests, show a change in volatility, which often leads to a change in price. Examples include ATR, Bollinger Bands and Envelopes.
4. Volume indicators.
Volume indicators are used to show the volume of trading in a particular currency. These are useful to confirm the direction of a trend or to signal a breakout. For example, if the pair trades in a narrow range and then breaks out on high volume, then this is a very bullish signal. Examples of volume indicators include Chaikin Money Flow, Demand Index and OBV.
The ideal charting set-up should have at least one indicator of each kind, but it's also important to remember that technical analysis is not foolproof. It's there to help you make trading decisions, but no indicator or set of indicators will give you a 100% success rate.
I've only touched on some of the technical indicators in this article and will discuss each one in more depth at a later date.
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