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Technical analysis is an approach to analyzing stocks that uses charts and indicators based on price and volume. Traders can make profitable trading decisions using technical analysis indicators and chart patterns. I have been using trading systems based on technical analysis and technical indicators for over 20 years and have had very significant success with this approach.

Technical analysts use charts and indicators to identify patterns and trends that can suggest trade ideas. For example, a stock’s price may trend upwards over a certain timeframe, indicating a bullish market. Or, a stock may be trading in a narrow range, indicating a lack of direction.

Technical analysts frequently use indicators, which are mathematical calculations based on a security’s price and volume. Some common indicators include moving averages, the relative strength index (RSI), and the stochastic oscillator. These indicators can be used to identify potential trade opportunities and help confirm trends.

Another key principle of technical analysis is the idea of support and resistance. Support is a level where a downtrend is likely to pause due to a concentration of demand. Resistance is the opposite, where an uptrend is likely to pause due to a concentration of supply.

Technical analysis also incorporates chart patterns, specific price and volume formations that can indicate a potential trade opportunity. Some common chart patterns include head and shoulders, triangles, flags and pennants.

Overall, technical analysis is a popular method used by traders to identify potential trading opportunities based on historical data and trends. It can be used in combination with fundamental analysis, which looks at a company’s underlying fundamentals, such as its financial health and industry conditions.

Introduction to technical indicators: What are they and how do they work?”

Technical indicators are tools traders use to analyze financial markets and make trading decisions. These indicators are mathematical calculations applied to historical and current market data, and they can help identify trends, patterns, and potential trading opportunities in the market.

There are many types of technical indicators. Some of the most common types of technical indicators include:

  • Trend indicators
  • Momentum indicators
  • Oscillators, and 
  • Volatility indicators

Trend Indicators / Momentum Indicators

Trend indicators are designed to identify the overall direction of a security’s price and can help traders and investors to determine whether a stock is in an uptrend, downtrend, or sideways trend. Some trend indicators include moving averages, moving average convergence divergence (MACD), and rate of change (ROC).

Oscillator Indicators

Oscillators are a type of technical indicator that is designed to help identify overbought and oversold conditions. They are called “oscillators” because they move or oscillate between two extremes, such as 0 and 100. When the oscillator is at or near one of these extremes, it can indicate that the security is overbought or oversold, respectively. For example, if the RSI (relative strength index) is above 70, it may indicate that the security is overbought, and a trader may look for selling opportunities.

As with all technical indicators, oscillators can be used on their own or in combination with other technical indicators and chart patterns to help identify potential trade opportunities. Some common oscillators include the RSI, stochastic oscillator, and Williams %R. These indicators can be helpful for traders looking to enter or exit a trade based on overbought or oversold conditions in the market.

Volatility Indicators

Volatility indicators, as the name suggests, are used to measure the level of volatility in a stock’s price. Examples of volatility indicators include the Average True Range, Bollinger bands and the average directional index (ADX).

Technical indicators can be used on their own or in combination with other indicators, and they can be applied to different time frames, from short-term intraday charts to long-term daily, weekly or monthly charts. However, when using technical indicators, it’s important to remember that they are not foolproof, and that they should be used as part of a complete trading system that has been fully backtested to ensure profitability using trading software such as Amibroker.

In conclusion, technical indicators are powerful tools that can help traders and investors to analyze financial markets and make more informed investment decisions. By understanding the different types of technical indicators and how they work, traders and investors can incorporate them into their own strategies and improve their chances of success in the stock market.

The 39 Most Common Technical Indicators

It isn’t easy to provide a definitive list of the most common technical indicators for stock trading, as different traders and investors may have different preferences. Each trading software and platform also comes with its own range of technical indicators.

However, here is a list of 39 of the most common technical indicators in stock trading with a brief description, ordered by popularity:

1. Moving averages

moving average is a technical indicator that shows the average value of a security’s price over a specified timeframe. Moving averages show trend direction as well as entry and exit signals.

2. Moving average convergence divergence (MACD)

The MACD is a trend-following indicator calculated using the difference between two moving averages.

3. Relative strength index (RSI)

The Relative Strength Index (RSI) is an oscillator that measures the speed and magnitude of a security’s price changes to identify overbought and oversold conditions.

4. Bollinger bands

Bollinger bands are a volatility indicator that consists of a moving average and two standard deviation bands above and below the moving average. It can be used for trend direction, strength as well as overbought/oversold levels.

5. Stochastic Oscillator

The stochastic oscillator is a technical indicator that compares a security’s closing price to its price range over a specified time period – typically used to identify overbought/oversold levels and to find divergences in the stock price.

6. Average Directional Index (ADX)

The ADX is a trend strength indicator that measures the strength of a trend. It measures trend strength but does not measure trend direction. This technical indicator is powerful as a trend filter to avoid entering into lacklustre moves.

7. On-Balance Volume (OBV)

The OBV is a momentum indicator that uses volume data combined with price movements to determine the strength of a security’s price trend.

8. Commodity channel index (CCI)

The CCI is a momentum indicator that measures a security’s price deviation from its statistical mean.

9. Fibonacci retracement

Fibonacci retracement is a technical analysis approach that uses horizontal lines to indicate areas of possible support and resistance. The levels of these lines are based on the Fibonacci sequence.

10. Ichimoku cloud

The Ichimoku cloud is an indicator that uses a combination of multiple moving averages to identify support and resistance levels and trend direction.

11. Williams %R

Williams %R is an oscillator showing the closing price relative to the high and low prices over a specified period. It can be used similarly to RSI and Stochastics to find trading signals.

12. Parabolic SAR

The parabolic SAR is a trend-following indicator that uses a series of dots to indicate potential reversals in the direction of a security’s price. The Parabolic SAR can be used as a system in its own right or as an entry trigger (or a trailing stop) as part of a more comprehensive system.

13. Money flow index (MFI) 

The MFI is a momentum indicator using price and volume data to measure buying and selling pressure.

14. Rate of change (ROC)

The ROC is a momentum indicator showing the percentage change in a stock’s price over a specified period. The ROC can be used as an oscillator or as an indication of trend strength.

15. Elder-ray index 

The Elder-ray index is a technical indicator that uses two moving averages to identify the strength of a security’s price trend.

16. Chaikin money flow (CMF)

The CMF is a momentum indicator using price and volume data to measure buying and selling pressure.

17. Accumulation/distribution line

The accumulation/distribution line is a momentum indicator that uses price and volume data to measure buying and selling pressure.

18. Coppock curve

The Coppock curve is a momentum indicator that uses a weighted moving average to identify potential buying and selling opportunities. Most frequently applied to the broader market to identify long-term turning points.

19. Detrended price oscillator (DPO)

The DPO is a trend-following indicator that removes the long-term trend from a security’s price to identify short-term overbought and oversold conditions.

20. Keltner channels

Keltner channels are a volatility indicator that consists of a moving average and two bands above and below the moving average based on the Average True Range (ATR). Keltner channels and Bollinger Bands are used in similar ways to make trading decisions.

21. Average true range (ATR)

The Average True Range (ATR) is a volatility indicator that measures the average range of a security’s price over a specified timeframe. The ATR can be used in many different ways in your trading systems, including for the placement of stop losses, trailing stops and the calculation of profit targets and breakout levels.

22. Trix

The Trix is a momentum indicator that uses triple smoothing to eliminate market noise and identify trends.

23. Standard deviation

Standard deviation is a statistical calculation that measures the distribution of price moves over a defined period. It is a volatility indicator that can be used similarly to the Average True Range.

24. Commodity selection index (CSI)

The CSI is a momentum indicator that uses multiple moving averages to identify potential buying and selling opportunities.

25. Volume-weighted average price (VWAP)

The VWAP is a technical trading indicator that shows the average price of a security based on its volume. VWAP can be used in similar ways to moving averages.

26. Volume-price trend (VPT)

The VPT is a momentum indicator using price and volume data to identify buying and selling pressure. This is similar in concept to the On-Balance Volume indicator.

27. Force index

The force index is a trading indicator that uses price and volume data to measure the strength of a security’s price move. It can be used as a short-term entry signal as part of a complete trading system.

28. Moving Average Envelopes

Moving Average Envelopes are a technical indicator that consists of a moving average and two bands above and below the moving average based on a specified percentage. These are typically used in a similar way to Keltner Bands or Bollinger Bands.

29. Donchian Channels: 

Donchian channels are a volatility indicator that calculates the highest high and lowest low in the stock price over a specified time period. These are used to identify breakouts and are primarily trend-following indicators.

30. Directional movement index (DMI): 

The DMI is a trend strength indicator that uses positive and negative directional movement to identify trend direction and strength. The DMI consists of the Positive Directional Movement (PDI) and the Negative Directional Movement (MDI). When PDI is above the MDI, the trend is up.

31. Chaikin volatility

Chaikin volatility is a technical indicator that uses the difference between the high and low prices over a specified time period to measure volatility.

32. Vortex indicator

The vortex indicator is an indicator that uses the difference between the high and low prices and the difference between the open and close prices to identify the trend. It is similar in concept to the Directional Movement Index.

33. Aroon oscillator

The Aroon Oscillator is a trend-following indicator that uses the difference between the Aroon up and Aroon down indicators to identify trend strength and potential trend reversals.

34. McClellan oscillator

The McClellan oscillator is a momentum indicator that uses the 19-day and 39-day exponential moving averages of the McClellan summation index to identify overbought and oversold conditions.

35. Chaikin oscillator

The Chaikin oscillator is a momentum indicator that shows the difference between the accumulation/distribution line and its moving average.

36. Triangular moving average (TMA)

The TMA is a technical indicator that uses multiple moving averages to smooth out market noise and identify trends.

37. KST oscillator

The KST oscillator is a technical indicator that uses multiple smoothed rate-of-change calculations to identify long-term trend changes.

38. Volume-weighted relative strength index (VWRSI)

The VWRSI is a momentum indicator that uses both price and volume data to measure the relative strength of a security’s price trend.

39. Time series forecast (TSF)

The TSF is an indicator that uses a moving average to forecast a security’s future price based on its past price data.

Using technical indicators in stock trading: How to incorporate them into your strategy

Technical indicators are powerful tools that can help traders and investors to analyze financial markets and make more informed investment decisions. By providing a quantifiable and objective view of market conditions, technical indicators can help traders and investors to identify potential trading opportunities and manage risk.

When using technical indicators in stock trading, it’s essential to understand their strengths and limitations. Technical indicators are based on historical and current market data and can provide valuable insights into the market’s behavior. However, they are not foolproof and should be used as part of a broader trading strategy that objectively covers all trading decisions.

To incorporate technical indicators into your stock trading strategy, you will need to choose the indicators that are most relevant to your trading strategy. As illustrated above, there are many different types of technical indicators, including trend indicators, momentum indicators, and volatility indicators. By selecting a combination of indicators that complement each other, you can gain a complete view of the market and make more informed investment decisions.

When using technical indicators, it’s essential to consider the time frame you are trading on. Different indicators may be more effective on different time frames, so it’s a good idea to experiment with different settings to find the ones that work best for you. 

Once you have selected your technical indicators, you will need to decide how to use them in your trading system or strategy. To use technical indicators, you can follow these steps:

  1. Choose the technical indicators that you want to use. There are many different technical indicators to choose from, and each has its strengths and weaknesses. Choosing indicators that align with your trading strategy and objectives is essential.
  2. Set up specific rules and criteria for entering and exiting trades. For example, you may enter a long trade when the RSI is below 30 and exit it when it rises above 70. Or, you may enter a short trade when the MACD crosses below its signal line and exit the trade when it crosses back above.
  3. Backtest your technical indicators using trading software like Amibroker to see how they would have performed in the past. This will help you determine how effectively your chosen indicators identify potential trade opportunities.
  4. Monitor your trades and adjust your strategy as needed. It’s important to continuously monitor your trades and adjust your strategy based on your results. This will help you fine-tune your technical indicators and improve your chances of success.

Remember that no technical indicator is a magic solution. Technical indicators are tools that can help you make more informed decisions. Therefore, it’s always important to do your own research, backtest your trading ideas as complete trading systems rather than relying solely on technical indicators.

What are the best technical indicators for trading stocks?

There is no single “best” technical indicator for trading stocks. Different indicators may be more or less effective depending on your trading strategy, timeframes you trade and your trading objectives. However, some of the technical indicators that I use and recommend the most for trading stocks include the following:

  • Moving averages: This indicator helps smooth out price action and identify trends. It is calculated using the stock’s average price over a specified time period.
  • Relative strength index (RSI): This indicator is used to identify overbought and oversold trading conditions. It is calculated by taking the ratio of the average gain to the average loss over a specified time.
  • Moving average convergence divergence (MACD): This indicator is used to identify potential trends and trade opportunities. It is calculated by subtracting the long-term moving average from the short-term moving average.
  • Bollinger bands: This indicator is used to measure a security’s volatility, trend direction and to identify trading opportunities. It is calculated by plotting a stock’s moving average plus and minus a specified number of standard deviations.
  • Average True Range: This indicator measures the volatility of the stock and can be used in many ways in your trading systems, including to calculate initial stop losses, trailing stops, profit targets and breakout levels.
  • Donchian Channels: These price-based channels are great for finding breakouts to enter into trending stocks. Donchian channels can be used to enter and exit trend trades.

The best technical indicators for trading stocks will ultimately depend on your trading strategy and objectives. Therefore, it will be helpful to experiment with different indicators and see which ones work best for you.

What is Technical Analysis Software?

Technical analysis software is a program designed to help traders analyze stock using technical indicators and chart patterns. Technical analysis software typically includes tools and features that make performing technical analysis on securities easier.

Some common features of technical analysis software include: 

  • Charts: Most technical analysis software includes tools for creating and customizing charts. This allows traders to see the price and volume data for a stock over a specified time.
  • Indicators: Technical analysis software often includes tools for plotting technical indicators, such as moving averages, relative strength index (RSI), and the stochastic oscillator. These indicators can help traders identify potential trade opportunities and confirm trends.
  • Signals: Many technical analysis software programs include tools for generating trading signals. These signals can indicate potential buy or sell opportunities based on the data from the technical indicators.
  • Backtesting: Backtesting allows you to apply your mechanical trading strategy to past stock market data to determine how effectively it would have worked in the past. Correct backtesting approaches will enable you to determine how robust a trading strategy is and how likely it is to make money in the future.

Technical analysis software is designed to help traders analyze securities using technical analysis. It can be a valuable tool for identifying potential trade opportunities and making more informed decisions.

Examples of Technical Analysis Software

Here is a list of 6 common technical analysis & backtesting trading software programs. Of course, there are many others around. Personally, I use and recommend Amibroker, Realtest and Metastock for stock trading, depending on your trading needs.

  1. Amibroker: Outstanding value trading software for technical analysis, charting and backtesting of single instrument and portfolio systems.
  2. Metastock: Excellent charting software for discretionary technical analysis and also backtests single instrument trading systems.
  3. Realtest: Fantastic new trading software which backtests portfolio systems and portfolios of trading systems. Limited charting functionality but outstanding backtesting capabilities.
  4. MetaTrader: Popular trading and backtesting software for automation; however, not as good a backtesting engine as Amibroker or Realtest.
  5. MultiCharts: Portfolio system backtesting software that uses Easy language (same as Tradestation). Solid portfolio system backtesting capabilities and built-in automation.
  6. TradingView: Extremely popular technical analysis software with some limited backtesting capabilities. Low-priced subscription product but inadequate backtesting capabilities for a serious system trader

Does technical analysis work?

After reading all of the above, you might be thinking, “That all sounds great, but does technical analysis work?” and “Is it a useful tool for traders?”.

While technical analysis has been around for many years and is widely used by traders, there are absolutely traders who make money with technical analysis and traders who lose money.

One of the key arguments in favor of technical analysis is that it can help identify patterns and trends in the market. By analyzing historical data and chart patterns, technical analysts can make educated guesses about where the market is headed. For example, if a stock has been in a strong uptrend, a technical analyst may conclude that it is likely to continue to rise.

Another argument in favor of technical analysis is that it can help traders identify potential trade opportunities. By using technical indicators, such as moving averages and the relative strength index (RSI), traders can look for signals that indicate a potential buying or selling opportunity.

Technical analysis can also help make trading decisions objectively rather than subjectively. When used correctly, it is extremely powerful. The best way to use technical analysis and technical indicators is to combine your technical indicators into a complete trading system and backtest that trading system to ensure it is profitable.

If you combine technical analysis indicators into a trading system and backtest it to ensure profitability, then follow the system consistently, you will have a much greater chance of trading success than combining technical indicators and subjectively making a trading decision.

Backtesting Technical Analysis Indicators and Concepts

One of the most critical steps in a trader’s evolution is moving from subjective technical analysis to objective decision-making using backtested trading rules. Backtesting means taking your trading rules and putting them into backtesting software such as Amibroker to determine whether they would have been profitable during the past.

If trading rules and technical indicators are correctly backtested then you will gain great insight into how profitable you are likely to be in real-time trading. There are many pitfalls of backtesting, so it is critical to learn how to backtest your trading ideas correctly. My flagship trader mentoring program, called The Trader Success System, teaches comprehensive backtesting techniques along with a large number of trading systems that you can deploy in your own trading. Click the link below to learn more about The Trader Success System.