Types of Technical Indicators

selecting time period on charts

If you understand how technical indicators work, it will make your charts analysis a more enjoyable, and more of a research and discovery process instead of a mechanical one.

Now, there are indicators that can inform you of the trend in advance, and these are referred to as LEADING INDICATORS

Then there are indicators that analyze the past prices, and then give a signal. These signals are slightly late and such indicators are referred to as LAGGING INDICATORS.

However, many chartists prefer to slot technical indicators into the following categories:

TYPES OF TECHNICAL INDICATORS

  1. TREND INDICATORS
  2. MOMENTUM INDICATORS
  3. VOLUME INDICATORS

Some chartists worship any one type of indicator while others work with a combination of 2-3.

There is one more indicator type – VOLATILITY INDICATORS. However, some of the indicators in the three categories above help you see through volatility too and therefore I am not covering volatility indicators here.

This may put off intermediate analysts but this is a basic article intended for beginners.

Therefore, if you want to become a proficient chart reader, you should learn all types, and play around with combos until you discover that magic mix that works for you. Remember that we are now slotting indicators based on the 4 categories above, not as lagging or leading.

Before getting into different types of indicators, check this image out:

how to check trends on charts

What do you conclude?

That 5 Minute, 15 Minute and 30 Minute Charts are bearish. The 1D chart may test a near term support.ย The 1 Week Chart is in an uptrend but is encountering stiff resistance at 10900 levels.

The lesson is that you must always check all chart periods regularly to figure out the larger and the smaller pictures before applying any indicator.

In the case above you know that the short term (1-2 days) indications are bearish and that the bearishness may continue if the Nifty breaks key support levels that you see in the 1 Day and 1 Week charts.

With that out of the way, let’s move to the different types of indicators:

A. TREND INDICATORS

Trend indicators help traders by showing the trend of the stock or the commodity.

Each indicator has its own peculiarities and you must understand all the key indicators mentioned below, at the very least.

WHEN THE MARKET IS IN A NARROW RANGE THERE ARE 50% CHANCES THESE INDICATORS CAN SIGNAL FALSE POSITIVES.

Some key indicators that will help you spot trends are:

Directional Movement Index (DMI)

Bollinger Bands

Exponential Moving Averages (Crossovers)

Ichimoku

Parabolic SAR

B. MOMENTUM INDICATORS

These indicators measure the strength of the price movement. These indicators are also referred to as Oscillators.

Momentum Indicators can help you spot:

  1. Overbought and Oversold levels
  2. Shift in trend
  3. Bull Zone or Bear Zone
  4. Divergences (for example when price is rising but Momentum Indicator starts falling)

Some of the key Momentum Indicators are

RSI

Stochastics

Commodity Channel Index

C. VOLUME INDICATORS

Volume is an important component of trade and volume based indicators use price and volume to indicate to traders when heavy quantities are being lifted or sold.

Some of the key Momentum Indicators are:

Money Flow Index

Elder’s Force Index

Chaikin Money Flow

The Issue With Indicators

Traders want the right signals and they want these on time.

Therein lies the problem.

The issue is that indicators have a default period – for example, RSI is set at 14, CCI at 20, etc.

The 14 and 20 numbers imply that the indicator line is drawn based on the calculation of the prior 14 or 20 candles.

However, there is no fixed rule that either 14 or 20, or whatever, represent the Holy Grail.

Intra day traders who trade on 3 and 5 minute candles set their indicators to very low periods. For example they may set RSI to 7, CCI to 10, etc.

Herein lies the problem.

When the default period is lowered the numbers of signals increase, but the accuracy goes down.

Conversely,

When the default period is increased the the accuracy goes up, but indicator slows down and the signal is late (after the price action has happened) .

So there is a trade-off between sensitivity to price and accuracy of signal.

To overcome this issue, you have no option but to try different periods and practice. You also must flip through different time periods on a chart to understand the intra-day, short and medium term trends. Regular practice will help you get a deep understanding of how indicators work and within a month of regular practice, you will be able to determine periods that provide reasonably accurate signals.

3 Comments on "Types of Technical Indicators"

  1. Dear Sir,

    thanks for this article. i am new in the market and just developed interest in TA. i have a doubt. As per another person who is very famous on Youtube, and almost appear everyday with new video with 2 days live. He explained that Technical indicators or strategies are different as per market trend. E.g there may be INTRADAY/SWING/LONG TERM strategies if market is BULL/BEAR/SIDEWAYS.

    in this way there may be 9 types of strategies (Bull market+Intraday, Bull market+Swing, Bull market+Long term OR Bear market+Intraday,Bear Market+Swing …etc) but he didnt explained which strategy should be use. Means he stated that there would be different strategy of INTRADAY in case of BULL/BEAR/SIDEWAYS market but he didnt explain which strategy(ies) should be apply ?
    can we request if you can explain or provide a list of different strateg(ies) which we may apply as per market trend ?

    Thanks in anticipation

    • Please wait till this month end. There will be something.

      • thanks you so much sir for your reply sir. However, i have got reply on one of my another issue when i posted on your Price action strategy- 9 :- 15 minutes BTST ๐Ÿ™‚

        thanks for being our mentor ๐Ÿ™‚

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