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Charting Education - Technical Indicators
Proponents of technical analysis, like those who learn by taking one of the popular BetterTrades classes in Atlanta, quickly understand the importance of indicators, a mathematical calculation used to predict future financial or economic trends.
There are more than 100 indicators that can be used to analyze a trade market transaction. That's really too many and a student who tries to learn them all will probably end up confused and overwhelmed with too much information. This can lead to the inability to make a decision, a problem known as paralysis by analysis.
Some of the primary indicators taught by BetterTrades include Stochastics, MACD, RSI and Cash Flow Accumulation. All have specific uses for specific circumstances. These technical indicators may help uncover more profits - or throw up a few red flags - when making a trade.
Stochastics are used for stocks that are channeling sideways. Stochastics indicate when a stock may be overbought or oversold. Stocks crossing the 20 percent line may be oversold and could provide a good buying opportunity. Stocks crossing the 80 percent line may be undersold and could provide a good selling opportunity. Stochastics don't work for trending stocks.
MACD is an abbreviation for Moving Average Convergence Divergence and is useful only for stocks that are trending. It is not useful for stocks moving sideways. When the short term moving average in MACD crosses a longer term moving average, it indicates a trend in that direction. The MACD histogram helps forecast a reversal of the trend. When a stock diverges from the MACD, it signals the end of the trend.
RSI is the abbreviation for Relative Strength Index, an indicator that compares the days a stock finishes up against when it finishes lower. RSI will hook up or down to indicate the reversal of a trend. A hook that occurs at the top or bottom of the panel will have the most significance. RSI indicates when a stock is overbought or undersold, thus a signal to buy or sell. RSI is very useful when it comes to momentum trading. But like most indicators, a trader doesn't want to base their entire decision to buy or sell a stock based on RSI. It should be a complementary indicator.
Cash Flow Accumulation indicates when major money is moving into the stock or leaving the stock. When cash flow hooks up or down, it could indicate a change in the stock trend. Again, the Cash Flow Indicator is best when paired with other technical analytics; it should not be used by itself.
