Published: November 18th, 2020 by Andrew
Are you a beginner and would you like to discover the secrets of online trading to make money with this profession? Or are you already in the industry, but can’t achieve the earnings you want? Perfect, then know that we have the solution for you, it’s called Trading Indicators.
Here on OnlineTradingCourse.net we take care of offering solutions to traders so that they can improve their performance. This can be done in a much simpler and more direct way than you might think. Sometimes you just need to use the right trading indicators!
Many traders, especially beginners, cannot understand how more and more people live on trading today. There is a tendency to think that there is some well-hidden secret, or they think that trading professionals are a sort of inimitable genius at whose level it is impossible to rise.
None of this is true. Today successful trading is only a matter of using the right tools, but in reality it was also in the past. The big difference is that if once only a few had access to trading resources and tools, they had to make long journeys to learn how to use them, today all you need is available online and for free. For example, there are free and complete Forex courses to study. Until a few years ago, the same courses had a value of several thousand Euros.
So, if you really want to make trading your source of income and profit, don’t miss this guide. The first investment that you can do is 10 minutes of your time in reading. This guide is dedicated to trading indicator, in order to gain full awareness of their potential to invest in financial markets. One day, when you will be successful in your investments, you may find yourself blessing this choice.
Before starting, we would like to remember that, thanks to eToro, it is possible to copy, in a completely automatic way, what the best traders in the world do.
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Thanks to eToro it is possible to start trading online before even mastering the use of the main trading indicators, because the best ones are automatically copied.
What are Trading Indicators?
An indicator is a mathematical construction. In the field of online trading, the indicators are used for technical analysis. Through them we process data relating to the past market price trend of any good or security, in order to predict its future performance.
There are many trading indicators and they have been created by analysts who are passionate about financial markets, in order to be able to read what happens on asset prices. They serve the purpose of interpreting the markets by studying the possible future moves of buyers and sellers, the two counterparts present on any market.
Trading indicators, therefore, are a fundamental part of technical analysis, but they are almost never used alone. At their side, we always try to use other measurements and the data coming from graphic conformations (the “forms” that are created by the price fluctuations of a market asset).
The indicators are divided into two main categories:
- Indicators: by actual indicator we mean those mathematical models that can be observed along the current trend on the market without any predefined range.
- Oscillators: on the other hand oscillators can always be considered indicators, but with the difference that they move within a predefined range, or around a line, the “oscillate” precisely.
Indicators can be used to trade on any asset or market, their effectiveness is always the same, because it is pure and simple mathematics.
Every asset or security that is subject to trade, whether it is Forex or stocks, has its own price, which in turn is subject to all general market laws. The trading indicators and oscillators analyze the price and its past performance, therefore they are only impartial observers of the markets.
Once the trader has collected the information from the indicators and oscillators, then he will really be able to make a decision on how to invest. If then the data of the indicators are also crossed with all the other possible sources available, then the trading becomes successful 8 times out of 10. Maybe this is the big secret of the professionals of the sector.
Trading indicators and operational signals
What does a trader’s job consist of? How does a financial operator spend his time at work? Most of the time it is used to analyze price graphs.
In fact, it doesn’t seem like a very fun prospect. Who would like to spend hours between graphs and numbers? For a beginner this is a very unattractive scenario, but it begins to please and also a lot as soon as you see the gains coming into the trading account.
Few people know that traders spend several hours doing market analysis. But if not, they would immediately lose the money they invest. Indeed, it is precisely thanks of these analyzes that we begin to make money. If the trading indicators were not used, there would be no means on which to base one’s decisions, in other words, one would operate at random.
Fortunately, the indicators are free and always available to solve problems and facilitate the life of the investor, they certainly do not help to complicate it (you can try many of them on the Metatrader platform, free).
How does a “trading signal” come about?
All that traders want is to receive “trading signals” from the market. But, what exactly is it? Trading signals are that series of indications that allow you to establish exactly the best time to enter and exit the market.
Operating on Signals is used to achieve the two main objectives of each negotiation:
- Maximize profits
- Limit the losses
Before continuing with the theory of trading signals, a practical tip: The ForexTB broker (one of the best) offers a free, very reliable trading signals service. You can sign up for free by clicking here.
It is important to add that the subscription to such a reliable signals service has a high monthly cost. In the case of ForexTB it is completely free.
Let’s now go back to the theory of trading signals and take the example of a trading session. Let’s talk about a typical situation in which every trader, beginner or expert is faced every day.
Once you have decided to start negotiating, you are in front of the computer and here you are faced with the price graphs of assets, such as oil, gold, the euro / dollar etc. The graphs show lines, signs, numbers and many other elements.
Those who are not familiar and accustomed to looking at them, probably after 5 minutes already have headache, but this is precisely the moment when they begin to do analysis, the aim is to put order and try to understand what is the situation of the market chosen for the investment. This is the moment when the most famous trading indicators come into play, and the most famous traders in the world know this well.
Read also our full review on ForexTB
Trading Indicators: all the types
In addition to the general differentiation between indicators and oscillators, technical indicators can be divided into two main groups:
1 – Leading Indicators
The leading indicators are based on the identification of trends, their formation and their occurrence, but they are also crucial to predict market reversals.
This type of indicator is used by traders in order to anticipate the change in the trend. The goal is to open and close market positions in anticipation of new trends.
It seems that leading indicators are the preferred type to make investments, since they anticipate the start of a trend by offering clear operational signals. In truth, however, leading indicators also offer many “false signals”. These are signals that do not bring the price in the direction estimated.
Leading indicators work by doing a market price analysis that starts from the price history. However, we know that the market does not always move in the same way and consequently the trend may be different from the cyclicality shown above.
The mathematical formulas that underlie these indicators often create false signals, which become real traps for traders. To avoid these traps, it is necessary to cross multiple data from other indicators, or in any case also to use the fundamental analysis to obtain confirmations.
Here are some examples of leading indicators:
- Stochastic Oscillator (SO)
- Relative Strength Index (RSI)
- Commodity Channel Index (CCI), that is ideal for trading commodities
- Average True Range (ATR)
- Average Directional Index (ADI)
For each type of indicator, it is advisable to deepen its functioning, in this way it is possible to understand in which particular market situations each of them is useful. In fact, even the indicators to be used, should not be chosen at random, but based on the type of asset on which one operates.
2 – Lagging Indicators
The “lagging” indicators (which operate deferred, late), instead, identify already formed trends or reversals that have already occurred. They are particularly useful for doing market analysis as they reveal the current condition of price movements with speed and efficiency.
Among the lagging indicators we have:
- Moving Averages (MA)
- Moving Average Convergence/Divergence (MACD)
- Bollinger Bands (BB)
- Parabolic Stop and Reverse (PSR)
Obviously, the lagging indicators also use historical market prices to provide useful data for making predictions on future price trends. The mathematical formulas behind these indicators work to create effective and reliable operational signals.
As it is easy to imagine, this category of technical indicators is also not free from defects. Lagging indicators have the problem that the data provided always arrives after market changes have occurred, this can lead traders to make the wrong decisions.
With this modality of operation, therefore, it is not possible to work by predicting the market trend, it can only be based on what has already happened. They are therefore useful for understanding the history of a price, but not for predicting its movement.
However, thanks to their characteristics, the lagging indicators are extremely useful for confirming the movement of the market and for understanding whether the trend change really happened or was only a false movement. Precisely in this way the lagging indicators are exploited by the most experienced traders. They help avoid false signals, which is why they should always be used.
5 Different categories of Trading Indicators
Up to now we have divided the trading indicators into some very generalist categories. However, it is possible to go into more detail, we can talk about the 5 main categories in which it is possible to subdivide the indicators with specific characteristics.
Specifically, we can talk about:
- Trend indicators
- Volume indicators
- Momentum indicators
- Volatility indicators
- Graphical indicators (such as Ichimoku)
Let’s now specify for all the various categories which are the main indicators and those deemed most effective for investing by market experts.
Trend indicators: what are they and how do they work?
To understand what a trend indicator is it will be better to specify first what a market trend is in more detail. When the market makes an important and lasting upward or downward movement, it is referred to as a market trend.
Identifying the start and end of a trend is a key component of a market analysis. A trend can be identified in the graph of a single asset, a sector or even an interest rate or yield on a bond.
The most common trends are called upward and downward. As an asset moves for highs and lows, an upward trend can be recognized by rising highs and lows. Similarly, we speak of a downward trend in the presence of decreasing highs and lows.
In total there are 3 market trends:
- Bullish Trend: it consists in an upward trend in the price for a certain period of time
- Bearish Trend: it consists that the price trend will be mainly downward in a certain period of time
- Sideways Trend: when the market continues not to rise or fall above a certain price range
So, the task of trend indicators is to help traders track down bullish or bearish market movements in order to make investment decisions. As the insiders of trading “The Trend is your Friend” historically say.
This means that the best market opportunities occur only when the market is in trend. For this reason it is easy to imagine the fundamental importance of all the indicators that help the trader to control the beginning and end of both bullish and bearish market trends.
Here are the main trend indicators:
1 – ADX (Average Directional Index)
The ADX, also known as the Average Directional Index, is certainly among the most famous and easiest to use trading indicators, its peculiarity is the ability to identify market trends easily.
The creator of the ADX was Welles Wilder, an engineer with a passion for technical analysis. He needed a tool to measure the strength of a trend and for this he created ADX. This indicator is so well structured that it is able to show when a trend loses its strength, but also when the market is congested or a sideway phase is created.
ADX is especially used to trade Forex, but its effectiveness goes far beyond this market. In reality, its analyzes are also reliable for other markets such as commodities or cryptocurrencies. By observing it, it is possible to understand the intentions of the investors on the market by identifying possible reversals in time.
Reading the ADX is quite simple because it consists of a few elements, but very clear and structured. Mainly there are two lines which must be followed: the Positive Directional Indicator and the Negative Directional Indicator.
To find out more about the ADX, read our complete guide by clicking here. In the guide we also talk about how to invest using it.
2 – Moving Average Indicator: simple, but effective
Moving averages are the easiest trading indicator ever and have been used since the beginnings of online trading. Every trader and financial analyst also has moving averages among his basic tools. Although they are easy to read, they also offer large spaces of interpretation useful to investors.
Moving averages are mainly useful for the purpose of following the market and its trends. They help the trader to choose the best time to open or close a market operation. In traditional technical analysis they represent algorithms.
These are mathematical tools that allow, through formulas, to obtain a concise indicator of the price trend of a financial asset. If we look at moving averages from a mathematical point of view, it is no coincidence that they carry this name. “Average” stands for averages of a certain number of mathematical values, and Mobile stands for the fact that these are constantly updated and moving lines.
Moving averages are calculated on the past trend of the price and tell us about its present. To find out more, read our guide dedicated only to Moving Averages here.
3 – MACD (Moving Average Convergence Divergence)
The so-called MACD is also a fundamental trend indicator. It is one of the most popular technical analysis indicators and it consists of moving averages. In particular it shows their convergence and divergence.
Even today many of those who trade on financial markets choose MACD because, as an indicator, it is able to offer numerous highly effective operating signals. In fact, the number of information coming from the MACD is really endless.
Not only is the MACD able to indicate the main trend of a market, but also the momentum and its duration. The MACD manages to do this because, in reality, it is like the combination of two indicators of different types. The first ones are two exponential moving averages of different durations to understand the trend.
The second is the difference between the two moving averages expressed by the so-called MACD Line and thus identifies a histogram that oscillates around an epicenter with zero value. The MACD histogram is able to provide useful information relating to the momentum of a market asset.
Volume Indicators: the participation in the market
Volume is a fundamental parameter for those who trade and for this reason volume indicators are also widely used.
Volume is the unit of measurement for quantity. In the financial sphere, the volume represents the number of contracts for an asset, which is exchanged over a specific period of time. Volume is one of the main indicators of market trends and liquidity and is often compared with prices.
The volume moves according to the market trend. So, if the prices of a market are rising, the volume will tend to increase or decrease instead if the market is falling. The volume is higher when we have significant price fluctuations in the markets, which generally occur following important financial news, macroeconomic announcements, political elections and so on.
Let’s find out the main volume indicators:
1 – OBV (On Balance Volume)
This indicator was developed by Joseph Granville in 1963, but remains one of the best around to control market volumes. Its specific task is to monitor trading volumes, an essential fact for those who work in Forex, but also on other financial markets.
What is the principle on which the OBV is based?
- An increase in incoming volumes leads to a bullish price move
- An increase in outgoing volumes leads to a bearish price movement
The indicator in question, therefore, is used to control the incoming and outgoing flows of a market.
2 – Money Flow Index Indicator
The other main volume indicator is the Money Flow Index. This indicator can also be used alone as it offers excellent market signals by basing its data on prices and volume, in order to suggest ideal moments of entry or exit from the market.
With the Money Flow Index, created by Gene Quong and Avrum Soudack, it is possible to observe oscillations that move between the values of zero and one hundred, here it is possible to find signals that indicate potential trend reversals. With this indicator you can also identify the areas of overbought and oversold.
Momentum Indicators: analyze the strengths and weaknesses of the market
With Momentum indicators it is possible to record the strength and speed of prices of a market and the trends on it, all of this in a certain predefined time frame. Generally momentum is stronger at the beginning of a trend, while it loses strength at its end.
So the concept of momentum is quickly explained. This is the speed of movement of prices on the markets, therefore it is crucial for making decisions in the investment phase.
There are two main indicators of Momentum:
1 – RSI Oscillator (Relative Strength Index)
RSI is the technical indicator of Momentum par excellence. It is used to find the overbought and oversold phases of the market and is mainly used on the Forex market, where it has all its effectiveness.
The calculation of the relative strength, as can already be understood from the name of the indicator, is used to express the strength or weakness of a certain financial instrument based on its past performance. This indicator was also identified by the good Welles Wilder back in 1978.
With RSI it is possible to measure the speed and extent of the direction of price movements. The RSI oscillates between the values of 0 and 100: it is in an overbought phase when is above the value of 70 and in an oversold phase below the value of 30.
To know the trading signals coming from this trading indicator, read our guide on RSI.
2 – Stochastic Oscillator
The Stochastic oscillator is also very important to know for anyone trading online. It proves to be very useful for identifying profitable moments of entry and exit from the market. Precisely for this reason traders tend to rely heavily on the data that this indicator is able to express.
Thanks to this indicator, price fluctuations can be identified and understood, managing to capture what are the best operating moments. But we must pay attention to the stochastic because it can also generate false signals from time to time.
Also the Stochastic is able to identify the overbought and oversold areas of the market. It is based on what is called stochastic calculation in mathematics, in order to try to better understand the possible changes in the price.
The Stochastic relates the closing prices of a currency and the price range in which the values of the asset fluctuate. So this indicator is able to identify the maximums and minimums of the market.
Read also: Forex Charts
Volatility Indicators: extent of market movements
What exactly is market volatility? Volatility is the tool that measures the change in the price of an asset over a specific period of time. It is mainly used to determine what the risk percentage of an asset is: the higher the volatility, the more risky the trading operation will be.
However, this depends on your point of view. In practice, it is the individual traders who choose what is an acceptable risk for them and how to operate on the markets. On the other hand, it is known that the highest profits come from investments in markets with a high volatility rate.
There is only one indicator of volatility that is really worth using:
Here, again, we are taking into consideration one of the main indicators ever used by those who trade on the financial markets. Bollinger Bands are a real milestone in online trading. Their task is to measure the volatility of the markets, that is the strength and participation in the price movements of the assets.
Bollinger Bands can also be considered a multifunctional indicator as they can help identify the overbought and oversold phases of the market. Thanks to their effectiveness, Bands are able to tell when market prices will move and if a trend is coming to an end.
With Bollinger Bands, excellent trading strategies can be structured, as the signals of entry and exit from the band market are effective in many cases. This tool was designed by John Bollinger, an American analyst with the cue ball for technical analysis that illustrated his 2002 method.
Find out more by reading our guide on Bollinger Bands.
Graphical Indicators: drawing is the key
Finally, we introduce some graphic indicators, that is, we are talking about indicators that go directly to the graphic representation of the price and that in most cases are manually traced by the trader as we will see.
The main graphic indicators are 3:
1 – Supports and Resistances
Supports and Resistances are straight lines that traders draw directly on the price graph and which are formed in what we can consider as the limit areas of the market.
The Supports are formed on price shares that the market cannot overcome downwards, while the Resistances are formed on price levels that are not exceeded upwards.
Trading with supports and resistances is quite simple because this indicator is easy to read and generates trading signals especially when the price, in the form of candles or lines, exceeds the line drawn by the trader in one direction or the other.
With supports or resistances you can make valid breakout strategies that indicate excellent moments to enter and exit the market. Moments in which strong volatility and price push are created.
Click here and read the in-depth guide to Supports and Resistances.
2 – Trend Line
Trend Lines work almost the same as that of supports and resistances, in the sense that they also generate signals based on the price breakout.
Trend Lines are drawn on market trends in order to understand if they are actually in progress or have come to an end.
There are bullish trend lines and bearish trend lines based on rising and falling price highs and lows. When a trend line breaks, trend reversals can occur in the market.
You can learn more by reading our article on Trend Lines.
3 – Pivot Point
Finally, as a graphic indicator, there are Pivot Points. These are technical analysis models that work identically to supports and resistances, except that in this case it is not the traders who trace them, but they appear on the graph based on mathematical calculations made previously.
You can learn more by reading our article on Pivot Points.
Trading Indicators: conclusions
Although this guide is quite long, we are sure that you could perceive here how vast the world of Technical Indicators is and how much potential it can express for those traders who are able to exploit the indicators in the best way.
What are you left to do now? Choose your favorite trading indicator, learn to use it and build your investment strategy to dominate the financial markets.
These are mathematical / statistical formulas that provide accurate indications about the future performance of an Asset.
Certainly among the most used are the MACD, the Stochastic, RSI and the Moving Averages. All three are characterized by an ease of reading and therefore of use.
Each trading platform has a dedicated section where all the available indicators meet.
Certainly the Metatrader, a platform widely used all over the world. The ForexTB Broker offers the Metatrader to all its customers.