Technical Indicator

Posted On: February 9, 2024

What are Technical Indicators?

A technical indicator is a mathematical pattern derived from historical data used by technical traders or investors to predict future price trends and make trading decisions. It uses a mathematical formula to derive a series of data points from past price, volume, and open interest data.

A technical indicator is usually shown graphically and compared with the corresponding price chart for analysis.

The mechanics of a technical indicator captures the behavior and sometimes the investors’ psychology to provide a clue of future trends of price activity.

Technical indicators are used in technical analysis to predict future price movements.

Some of the technical indicators are : momentum readings, volume patterns, price trends, Bollinger bands, RSI, moving average, Elliot waves, oscillators, and sentiment indicators.

Understanding Technical Indicators

A technical indicator is generally a mathematically derived representation of data, such as price, volume, or open interest, to detect stock movement. The indicator is weighed based on historically-adjusted returns, common sense, an investor’s objective, and logic to evaluate investments and identify trading opportunities.

Some technical indicators generate signals as stand-alone, while others supplement each other.

As elements of technical analysis, they are used to evaluate a security’s strength or weakness by focusing on trading signals, patterns or price movements, and other analytical charting tools. Although there are non-specific technical indicators with regard to the market, some technical indicators are meant to be used for a specific financial market.

How to interpret Technical Indicators

The technical indicators are to be interpreted individually and collectively.