What are Technical Indicators?



Technical indicators are using mathematical and statistical data that enable market participants to estimate future fluctuations. However, you need to keep in mind that even the most accurate indicators and technical analyses do not always guarantee a profitable trade and they should be analyzed in combination with trading chart patterns. Below are some of the most popular and commonly used technical indicators.

Fibonacci retracement

Fibonacci retracement tool is most efficient when the price is in a trend. Thanks to Fibonacci levels investors can determine turning points in price, support and resistance levels, correction duration and the length of a trend. Fibonacci indicator, once placed on a recently concluded impulse, will show retracement levels. The strongest and most significant of them are levels of 50.0 and 61.8 percent of the base section. The indicator is place on the previous section by connecting its high and low swings.

Moving Averages (MA)

It is one of the simplest indicators used by traders. MA shows an average price over the specified period. For example, frequently used by traders 50 moving average calculates the average of the closing prices from the last 50 number of periods. In the daily chart, it will be 50 MA of the last 50 days. It helps to smooth out the price’s fluctuation and help to recognize the trend as well as the potential future price movement. It can be used also as a support or resistance line. There are two types of moving averages as explained below.

Simple Moving Averages (SMA)

This moving average is more susceptible to sharp price movements such as spikes usually caused by fundamental reports. As such, rising moving averages might distort past price movements and send a false signal about upcoming uptrend or downtrends.

Exponential Moving Average (EMA)

To prevent distortion caused by sharp price movements, a second type of the moving averages is used – Exponential Moving Average. EMA represents latest price actions more accurately than SMA. In calculations it gives more emphasis to recent price movements. Therefore, spikes appearing earlier give less weight to the indicator compared to recent price action.

Moving Average Convergence Divergence (MACD)

The base of this momentum indicator is moving averages, that is why MACD is perfect to analyze price dynamics, understand the general direction in pricing and spot trend entrances such as buy and sell signals. The oscillator is composed of three indicators: faster-moving average, slower moving average and the moving average of the difference between the faster and slower moving averages. The usual default parameters for the MACD are “12, 26, 9.” 12 represents the previous 12 bars of the faster-moving average, 26 represents the previous 26 bars of the slower moving average and 9 represents the previous 9 bars of the difference between the two moving averages. MACD contains three elements: MACD line (mainline), signal line and histogram. MACD line is calculated by extracting slower moving averages value from the value of faster moving averages. The results show a short-to-medium-term trend. Another line, signal line, is Exponential Moving Average (EMA) extracted from MACD line. In the case of mentioned default settings, it would be 9-day EMA of MACD line. A histogram is calculated by extracting signal line value from the MACD line and it shows a distance between them. MACD line (mainline) and a signal line are shown as lines of different colors, while the histogram is visualized as a sequence of vertical bars. When the MACD line crosses above the signal line, it is a buy signal; when the MACD line crosses below – it is a sell signal.

Relative Strength Index

The Relative Strength Index is a price oscillator giving information about price strength on the chart using a graph with a range from zero to one hundred. It informs market-watchers the time price enters overbought (above 70 level) or oversold area (below 30 level). This signals a potential change of price direction in the short term. The standard RSI setting is 14-period, which means that the indicator takes into account the value of the last 14 candles or time periods. RSI compares average profit and average loss, as well as analyzes how many of the last 14 candles were bullish and how many bearish. It also analyzes the size of each candle included in calculations. The RSI helps also to identify turning points when RSI does not coincide with actual price movement on the chart, showing a divergence.