Technical indicators are based on various metric and statistics about securities that are used to find patterns and understand and predict changes in their price. They are used to analyze trends, calculate price averages and measure relative price volatility among other things.
Indicators can be based on price history, trading volume or momentum; sometimes they are used in tandem or as a combination. A metric such as trading volume, for example, can provide guidance on future price movements. Indicators are said to generate ‘buy’ and ‘sell’ signals that a trader uses to make trading decisions.
Following are some examples of common technical indicators that are used by securities traders.
On-Balance Volume
The on-balance volume (OBV) indicator is used to measure the positive and negative flows in the volume of a security traded over a period of time. The indicator is calculated by maintaining a running total of up and down volume. Up volume refers to the amount traded on a day when the price increased while down volume is the amount on a day when the price fell. A rising OBV means that buyers are willing to support the share price higher while when OBV is falling it means that selling is greater than buying and indicates that a lower price is likely.
Accumulation / Distribution Line
The accumulation / distribution line measures the amount of money flowing in and out of security. It is similar to the OBV indicator but instead of only considering the closing price for the security in a given period it also looks at the price trading range for the period and what the closing price is relative to that range. If this indicator line is trending up it points to buyer interest because the stock is closing above the median point of its range while if it is falling it means the price is in the lower half of its daily range and indicates a downwards price trend.
Average Directional Index
This trend indicator measures the strength and overall momentum of a price trend. If the average directional index (ADX) is above the value of 40 it means the trend direction is strong and applied whichever way the price is moving, up or down. When the ADX is below the value of 20 a trend is considered to be showing a weak direction.
Relative Strength Index
The relative strength index moves between a value of zero and 100 and plots recent price gains against recent price losses. It is used to gauge price momentum and trend strength. It is often used to indicate if a stock is oversold or overbought.