For those who are new to this subject, technical indicators are based on mathematical calculations and are broadly divided into two categories: overlays and oscillators.
Overlays – Indicators which are plotted along with the price scale and top of the chart.
Oscillators-Indicators that typically have a high & low band ranging values and are mostly plotted below the chart.
So, let us start with the 3 must know indicators.
1. Moving averages
Most common and simple yet powerful, Calculates average change in data over a specified period. Moving averages are also called moving trendlines.
There are various combinations and strategies to trade the MA’s (Moving averages) one of them is breakouts – where trade is initiated when the price crosses the MA.
Crossovers – A combination of two moving averages are plotted on the chart while one is of a shorter period, example: 50 and 200 DMA (Day Moving average). A trader gets a buy signal when the 50 DMA crosses over the 200 DMA and sell signal when the 200 DMA closes below the 50 DMA.
When the 50 DMA closes above the 200 DMA this is called the golden cross similarly when the 200 DMA closes below the 50 DMA it is called the death cross.
2. ATR – Average true range.
Stop losses are an important aspect of trading, protecting your capital should be the top most priority you want to be consistent in the markets- Often traders complain of getting stopped out of the trade which means their stop losses are always triggered.
While market movements are in no one’s control, erratic moves, sudden swings and daily volatility are contributing factors one common mistake we make is underestimating the price movements. ATR helps to gauge the daily/ weekly price fluctuations.
Calculation
ATR = (Previous ATR * (n – 1) + TR) / n
Where:
ATR = Average True Range
n = number of periods or bars
TR = True Range
ATR increase signifies increase in Volatility- so when the ATR is increasing make sure your stops are placed farther from the entry price – One simple trick is to at least keep ½ the value of ATR as stoploss.
3. ADX – Average Directional Index
Do you often get stuck in stocks which do not move? Chances are the stock is not in a trend or trading sideways. ADX helps to measure the strength of the trend in just a
.
Developed by J. Welles Wilder, Jr. also known for creating one of the most popular indicators RSI (Relative strength Index)
ADX is a non-directional indicator which means it will not tell you in which direction the security will move but will calculate the strength of the indicator.
Let us get straight to understanding the indicator, The value represents if the stock is trending or not.
ADX Value Trend
0-25 Trend is weak
25-50 Strong Trend
50-75 Very strong
75-100 Excellent
Avoid trading when the ADX value is lower than 25.
(The author is Founder, IamRakeshBansal.com)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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