Stock market indicators are nothing else but support systems for any decision of traders. They are used to form different patterns based on historical data so that the entry and exit points can be decided in any trade. By the exact analysis of any indicator it is possible to attain maximum profit. From Dow jones live to Nifty every stock in any market or any index can be analyzed using these stock market economic indicators. Due to the significance of the indicators nowadays any discount broker gives free technical analysis tools on its trading platform.
Among all the types of stock market Indicators the most popular ones are as follow :
- MOVING AVERAGE
- EXPONENTIAL MOVING AVERAGE
- STOCHASTIC OSCILLATOR
- MOVING AVERAGE CONVERGENCE DIVERGENCE
- BOLLINGER BANDS
- RELATIVE STRENGTH INDEX
- ICHIMOKU CLOUD
- FIBONACCI RETRACEMENT
- AVERAGE DIRECTIONAL INDEX
- STANDARD DEVIATION
Moving Average (MA)
Moving average is the most important indicator. It is used to mark up the common trends in the Market. It is used to filter out bague fluctuations and get an average movement of the stock based on the limits set. The limits set are somewhat like 50 DMA, 200 DMA etc. DMA means day moving average.
Moving average is calculated by adding the all the values in the set and dividing the sum by the number of days or time frame. For example if we take data for a 5 year average the calculation would be adding up data from 1st year up to 5th year and then dividing it by 5. Hence getting an average price for that 5 year period.
MA is very important in determining the resistance and support levels in any trend of the market. There are two main types of MA :-
> EXPONENTIAL MOVING AVERAGE (EMA)
> SIMPLE MOVING AVERAGE (SMA)
We would learn EMA in the next point but let’s discuss what SMA is. Simple moving average is found out by taking the avg. of closing prices of a stock over a particular period of time. For calculation we divide the total of closing prices by their actual number. I.e. if we take data for the past 5 days then we divide the addition of 5 closing prices by 5.
Exponential Moving Average (EMA)
EMA is one type of moving average only. But the difference between EMA AND SMA is that EMA puts more focus on recent price changes. The most important and popular EMA are 12 and 26 EMA points. For long positions the famous EMA are 50 and 200. They are very helpful and useful in determining the legitimacy of market movement and direction of movement.
EMA is based on recent changes in price. Traders prefer this indicator more. The reason is traders need to make quick decisions on a daily basis. EMA helps them in making accurate decisions because of its recent price consideration method.
Stochastic Oscillator compares the closing price of a stock to the prices displayed in previous sessions. It evolved around 1950. It is used to mark the overbought and oversold zones has a numeric value range from 0 to 100. Any reading above 80 signals overbought zone and any reading below 20 signals oversold zone. If the trend is strong then the movement in the desired direction may not be possible on the basis of reading.
Stochastic oscillator consists of two lines. One for the actual value of stock and another showing the three day SMA. An intersection of both these lines is a signal for reversal.
The main limitation is that sometimes the reversal points may not work. For example : Recently the bank nifty rise so high in hopes of good loan moratorium case news, U.S. Stimulus and constant FII buying. In such scenario if Oscillator shows overbought zone then also the trend is going to continue on basis of positive news. So it is a risky indicator. A mix of various indicators along with this may give good returns.
Moving Average Convergence Divergence (MACD)
It provides information about a share’s momentum. It collects data from various averages and imparts important support and resistance points. Trader can enter trade while following this levels and having a stop loss on hold so that he can get maximum gain if the entry point displayed is accurate.
MACD has three elements :
It measures the distance between two average lines
It identifies the price movement variations and signals entry and exit points for entering and exiting a trade.
It shows the difference between both the above mentioned lines (MACD and SIGNAL LINE)
A histogram is displayed after time periods are filled in (26 for MACD and 9 for Signal generally). If the MACD line intersects the Signal line from below it triggers buy rating and when MACD intersects the Signal line from above it triggers Sell rating.
It is a reliable indicator as it provides information about strength of the trend and trigger points. MACD is a short term indicator because it only takes a maximum time period of 26 days in MACD requirements. It is the biggest drawback of this indicator.
Bollinger bands are like a curvy never ending structure formed around the price line of a stock. It has three bands: Upper band (MA), lower band and middle band. They contain two elements namely %B and bandwidth. Both of them are important for determining market pattern and individual stock movements.
When the candle moves above the middle band it signals a bullish trend and when it goes below the middle band it signals a bearish trend. Also if the candles touch the upper band and stay there for a while it definitely signals an upward breakout. When the price line touches the lower band and stays there for a while it strongly signals a bearish breakout.
When the range of the Bollinger band is narrow, the market is non directional and is under review. It identifies an opportunity of correction and signals that the market can move in either direction.
The widening in bands is a signal of increasing volatility in the market. Hence the price will be moving in any one direction specifically at the end of this volatile trend.