How do stock market technical indicators work?
Technical indicators allow you to graphically visualize the evolution of the speed and quality of movement over a given period. Stock market indicators allow you to predict future price movements and are valuable decision-making tools if you know how to use them. It is important to fully understand how they work in order to then optimize the settings and make the indicator effective. There are no magic stock market indicators, only technical indicators that we use well or badly. Each has its own qualities and its own shortcomings. Some indicators work better in a directional market, while others are better at detecting reversals. There are different types of technical indicators in the stock market:
- Momentum Indicators: These indicate the strength and speed of movement. They allow you to determine the slowdown in the buying / selling trend and warn of a possible correction / short-term market reversal. These indicators give bad buy/sell signals, so they should be used to detect divergences from the price curve.
- Oscillators Indicators: Oscillators can be capped or not. They help identify areas of tension between buyers and sellers that could lead to a short-term correction/reversal. Most traders use these indicators for their overbought/oversold areas when they perform poorly. Oscillators are important leading indicators mainly in an omnidirectional market or to detect divergence in a directional market.
– Trend indicators: reflect the dynamics of the market and, in general, its speed. They allow you to determine the current trend and determine support/resistance levels. Thus, a trader can set price targets or place protective stops. These indicators work very well in a directional market, but don't work well in a volatile or sideways market.
- Volatility Indicators: These reflect the nervousness and indecision present in the market. They allow you to measure the degree of risk. The higher the volatility, the greater the risk. These indicators do not give buy/sell signals, but show an excess. It is these excesses that can be used by a trader in any market conditions.
– Volume indicators: reflect the strength of the movement and the psychology of investors. The larger the volume, the more meaningful the movement. Conversely, low volumes indicate that the movement is fizzling out and a correction is possible. Volume indicators need to be analyzed along with the price chart, they do not mean anything by themselves. These indicators can be used both in a directional market and in a non-trending market.