Technical Indicators for Stock Analysis
Technical indicators reveal market trends and help predict stock prices. Fundamental analysis uses financial ratios and balance sheets, while technical analysis uses price and volume data. Below are key technical indicators for trading decisions.
Moving Averages
MAs are used to identify stock price trends. They smooth price data by calculating time-frame averages, making trends easier to see. Rising MAs indicate bullishness, while falling ones indicate market weakness.
- 50-Day MA (DMA): Useful for short-term trend analysis.
- 200-Day MA (DMA): Helps identify long-term trends.
When a stock trades above both its 50-DMA and 200-DMA, it typically signifies a strong uptrend. The two main types are:
- Simple Moving Average (SMA): Averages all data points equally.
- Exponential Moving Average (EMA): Gives more weight to recent data, making it more responsive to recent price changes.
MAs are foundational for many other indicators, offering insight into general market direction.
Moving Average Convergence Divergence (MACD)
Stock price trends are identified using MA. They calculate averages over specific time frames to smooth price data and reveal trends. A rising MA indicates market strength, while a falling one indicates weakness.
- Bullish Crossover: Occurs when MACD rises above the signal line, indicating a potential upward trend.
- Bearish Crossover: Occurs when MACD falls below the signal line, suggesting a possible downtrend.
While MACD is insightful, it should be used alongside other indicators, like MAs and RSI, to confirm trends.
Relative Strength Index (RSI)
RSI measures the speed and change of stock price movements, ranging from 0 to 100. It is a leading momentum indicator, often signalling trends before price changes are visible.
- Overbought: RSI above 70 suggests the stock may be overvalued.
- Oversold: RSI below 30 indicates the stock may be undervalued.
With its predictive power, RSI can help you spot potential reversals early.
Bollinger Bands
Developed by John Bollinger, Bollinger Bands are volatility bands that adjust as volatility changes. They consist of a 20-period SMA in the centre, with two bands placed 2 standard deviations above and below the SMA.
- Price Breakout: When the price crosses above or below the bands, it may signal a new trend.
- M- and W-Patterns: Bollinger Bands can highlight M-bottoms and W-tops, aiding in trend identification.
Due to their sensitivity to volatility, Bollinger Bands should be used with other indicators for reliable trend confirmation.
On Balance Volume (OBV)
Volume-based OBV measures buying and selling pressure by adding volume on up days and subtracting it on down days. Volume usually precedes price action, so it confirms trends.
- Bullish Trend: Positive volume exceeds negative volume, and OBV rises.
- Bearish Trend: Negative volume is higher, causing OBV to fall.
Using OBV can help you detect trends before they are evident in price charts alone.
Aroon Oscillator
The Aroon Oscillator measures the difference between Aroon Up and Aroon Down, helping to identify the beginning or end of a trend.
- Formula:
- Aroon-Up = 100 x (25 - days since 25-day high) / 25
- Aroon-Down = 100 x (25 - days since 25-day low) / 25
- Aroon Oscillator = Aroon-Up - Aroon-Down
An uptrend occurs when the oscillator is above zero, indicating more highs than lows. A negative value implies the opposite. This simple tool can confirm strong or weakening trends.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.