Top 5 Stock Indicators You should know

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Ashu is a newbie to the stock market world. He wishes to understand it but all these investment decisions are daunting for him. He wishes for a friend to tell him how the market is performing in time.

Here comes the stock market genie, to advise him that he can get guidance in formulating investment decisions with stock market indicators. As an investor, you can make wise decisions with stock market indicators. 

Stock indicators are backed by rationale as they draw conclusions based on the formula applied to data points. The market indicators are built by analysing different companies which reach a new high in relation to those which create a new low. 

How can you use stock indicators? 

For instance, a case where the stock indicator indicates that there’s a bullish phase, you can step-up the investments. On the contrary, if the indicator indicates a bearish phase, you can tune down your investments, if needed. 

5 key stock indicators

Now, let’s have a look at 5 key stock indicators which can set the right foundation for you:

1. RSI - momentum oscillator 

In order to technically measure the magnitude of changes in recent price to evaluate overbought or oversold conditions in the price of stock or asset, the relative strength index (RSI) is used. RSI is a momentum indicator. The RSI is shown as an oscillator which is a line graph. The graph moves between extremes and you can have a reading from 0 to 100 on it. 

As per the traditional interpretation of RSI, the values of 70 or above depict that the security is becoming overbought or overvalued. The security might be primed for a trend reversal or corrective pullback in the price. A reading a 30 or lower on RSI indicates it is either oversold or undervalued condition of the security. 

It is important to understand the primary trend of the stock or asset. This tool helps in making sure that the readings of the indicator are clear. Constance Brown, CMT, a renowned technician in the market has advocated an idea that an oversold reading on the RSI indicates an uptrend which is likely to be much higher than 30%. Also, an overbought reading on RSI in a downtrend os much lower than 70% level.

2. ADX - measures trend strength 

While trading, assessing the strength of trend can be crucial, irrespective of its direction. When you want to analyse the strength of a trend, the Average Directional Index (ADX) is the technical indicator which is used for this purpose. ADX is also an oscillator and a non-directional indicator, which means that it fluctuates and is based on the comparison of highs and lows of bars. The ADX fluctuates from 0 to 100. A reading below 20 indicates a weal trend. And a reading above 50 indicates a strong trend. As per the calculation, higher the ADX, stronger is the trend and lower the ADX, weaker is the trend. In the case of a lower ADX, it is the period when the price is usually sideways or trading in a range. The case where ADX rises above 50, the price picks up momentum in one direction. ADX is not a determiner of the trend being bullish or bearish, rather, it indicates the strength of the current trend. The major role of ADX is to identify if the marketing is in a range or is starting a new trend. Therefore, when the trend is stronger, the reading will be larger and vice-a-versa. So the next time whenever the trend changes and you have to make a decision about it, ADX will come handy in helping you. 

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3. Moving averages

The moving averages are the oldest and most helpful technical indicator. You can get reliable signals and understand the trend in a “smoothed” manner when used in partnership with other oscillators- MACD and RSI. The three moving averages are Simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA). 

The SMA is widely used by traders and investors. You can calculate different prices- open, close, high, and low. SMA depends on the past price data for a specific period of time, hence, it is a backwards-looking indicator. 

You can use SMA to understand the buy and sell signals. You can identify support and resistance prices of stocks which will help in signalling where you should trade the asset. SMA crossover is also used to indicate bullish and bearish price action. When generating the indicator, you must calculate it by using the past price data and then plotting it on a chart. SMA is the average of the stock price over a certain period based on a set of particular parameters. You can calculate the moving averages by adding the price of a stock over a period of time and diving it by the sum total of periods. 

4. Bollinger Band

To identify the volatility level for a currency pair, the Bollinger band is used. To define the pricing channels, Bollinger Bands are set over a price chart. The Bollinger Band has bands above and below the line of moving averages which define the upper and lower rate boundaries. The volatility os measured using these lines. 

5. RRGs 

To measure the relative strength analysis, you can use Relative Rotation Graphs (RRGs). RRGs are visualisation tool, unlike others. For several securities, you can use RRGs to analyze the relative strength trends of various securities against a common benchmark. You can maximize the usage of this tool by plotting relative performance on one graph and see true rotation. You can visualise the sector and asset class rotation sequence on linear charts. Four quadrants are used to define four phases of the relative trend. When securities move from one quadrant to other over a period of time, you can see true rotations. The Relative Rotation Graphs helps in distinguishing the market leaders from the market laggards. You can save money and time with Relative Rotation Graphs as it narrows the focus to the segment of the market which requires your attention for further analysis. Since Relative Rotation Graphs measures both momentum and trend for relative performance, it can be tailored to meet any trading or investment style. 

Wrapping up!

Now you know about key stock indicators how about we introduce you to sectors in the stock market! Watch out for our next chapter.

Recap!

The 5 key stock indicators which can set the right foundation for your stock market investments are RSI, ADX, Moving averages,  Bollinger Band, RRGs.

  • RSI is a momentum oscillator
  • ADX measures trend strength
  • Moving averages understands the trend in a smoothed manner
  • Bollinger Band identifies the volatility for a currency pair 
  • RRGs measure relative strength analysis
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