A technical indicator is a mathematical calculation that can be applied to a security's price data, volume data, or a combination of both. The result is a value that is used to anticipate future changes in price. A moving average fits our definition of an indicator. Moving averages are examples of trend following, or "lagging," indicators. These indicators are superb when prices move in relatively long trends. They don't warn you of upcoming changes in prices, they simply tell you what prices are doing (that is rising or falling). There is a saying amongst technical analysts that if you can get two independently derived indicators confirming the direction and strength of a trend, then you should probably trade in the direction of that trend. You should gain a basic understanding of some of the more popular technical indicators and how they can be combined to form your first trading system. Trend Indicators Some of the more popular trend defining indicators are: * Moving Averages: A moving average is an average of a security's price over a defined time period. The average changes. If you look at, say, a 30-day moving average, it takes into account the most recent 30 trading days. Moving averages often indicate levels of support or resistance * Directional Movement measures whether a market is in a trending mode and suitable for a trending following system * Linear Regression: Simple regression of price changes over a period of time which can help identify what might be reasonable in terms of valuation levels and project those into the future. Different time periods produce different regression results and can help identify potential price projections when the major long term trends of the market change direction |
