Top 5 Technical Analysis Tools used for Trading

Technical Analysis can be defined as an art and science of forecasting future prices based on the past price movements. Technical analysis is based on analyzing demand-supply of stocks, indices, commodities, futures or any tradable instrument. Traders use this study to predict price of tradable instruments which also includes information like prices, volumes and open interest on a chart and applying various patterns and indicators to it. Traders can predict trend, support and resistance levels, entry and exit levels using technical analysis.

—-Technical analysis is the attempt to forecast the prices on the basis of market-derived data.

—-Technical  Analyst usually look at price, volume and psychological indicators over time.

—-They are looking for Theories, Trends and Patterns in the historical data that indicate future price movements.

Types of Chart :

—Lines Chart

—Bar Chart

—Japanese Candlestick Chart

—Point & Figure Chart

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Following are the top 5 Technical Analysis Tools used by traders for trading.

Moving Average – This is widely used indicator in technical analysis that helps traders to smooth out price action by filtering out the noise from random price fluctuations. A moving average (MA) is a trend-following or lagging indicator as it is based on past prices of securities/ commodity.

The two commonly used MAs are the Simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the Exponential moving average (EMA), which gives bigger weight to more recent prices. Moving Averages are used to identify the trend direction and to determine support and resistance levels of trading instrument. Most important MAs are 10, 21, 50, 89, 100 and 200.

MACD – Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator. The MACD shows the relationship between two moving averages of prices.
The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

There are three common methods used to interpret the MACD.
1. Moving average crossover
2. Centerline crossover
3. Divergence

Relative Strength Index (RSI) – The RSI is A momentum oscillators. RSI is a momentum oscillator generally used in sideways or ranging markets where the price moves between support and resistance levels. It is one of the most useful technical tools employed by many traders to measure the velocity of directional price movement of security/ commodity.

How to use RSI Indicator?

The RSI oscillator ranges between 0 and 100.
Technical analyst use 30% as oversold and 70% as overbought lines to generate the buy and sell signals.
Buy/long when the indicator moves from below to above the oversold line.
Sell/short when the indicator moves from above to below the overbought line.

Stochastic– Stochastic oscillator is a momentum indicator which uses support and resistance levels. The Stochastic indicator was developed by Dr. George Lane developed this indicator in the late 1950s. The term stochastic refers to the point of a current price in relation to its price range over a period of time.

How to use Stochastic?
Technical analyst use 20% as oversold and 80% as overbought lines to generate the buy and sell signals.
Buy/long when the indicator moves from below to above the oversold line.
Sell/short when the indicator moves from above to below the overbought line.

The stochastic oscillator is calculated by the following formula.
The default number for n previous trading periods is 14
%K= (today’s Close)-(Lowest low over a selected period)/ (Highest over a selected period) – (Lowest low over a selected period)

Buy/long when %K line crosses % D line to the upside in oversold zone and sell when %K line crosses % D line to the downside in overbought zone

 

About Narendra Joshi 1 Article
I am Narendra joshi. A trader and investor. I follow rules of technical analysis and apply these on highly traded futures on commodities, index and Indian equity market. I work for full time traders, provide them REAL TIME market trend and Price levels on MCX Commodity market and also provide a general view of Indian equity market and Index.

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