Technical Analysis: Common Indicators and How They work

Stock Market Technical Analysis

It is time for the second installation of the Technical Analysis series! Just as a recap, in the last post on technical analysis we went over the most common chart patterns and how to use them to your advantage. Remember there are three types of chart patterns; bullish, bearish, and neutral. Today we will be taking a look at the other part of technical analysis: indicators. We will go over the most common indicators, MA, EMA, VWAP, MACD, and RSI. As always, don’t forget to like this post, subscribe, and check out other content!


What are Technical Indicators?

Technical Indicators are pattern based signals produced by the price, volume, etc. of a certain stock. They are used by those who perform technical analysis to provide historic context when predicting the future price action of a company’s stock. There are a lot of technical indicators out there, and some may be hard to understand. Which can lead to a lot of confusion amongst beginning investors. Indicators can allow the analysis of a stock on macroscopic and microscopic levels. They also allow for the analysis of price strength.


5 Most Common Indicators

1. Moving Average (MA)

Past price movement produces the Moving Average (MA) indicator. An MA indicator helps determine the support and resistance levels of a stock. A 15 day MA contains price movement from the past 15 days, while a 200 day MA contains price movement from the past 200 days. Shorter lengths are used to analyze stocks on a microscopic level, and larger lengths are used for macroscopic analysis. Pairing a small range MA with a large range exponential moving average (EMA) is a popular way to analyze on microscopic and macroscopic levels.

5 Day Moving Average of AT&T Stock
5 Day MA of AT&T (T)

2. Exponential Moving Average (EMA)

An Exponential Moving Average (EMA) is a variant of the MA. However, EMA places more value on recent price action rather than past. Previously mentioned, using a long term EMA and a short term MA allows great analysis. This is because if the short term MA is trading above the long term EMA then the price action is considered bullish, with the opposite being considered bearish.

5 Day Exponential Moving Average of AT&T
5 Day EMA of AT&T (T)

3. Volume Weighted Average Price (VWAP)

The Volume Weighted Average Price (VWAP) shows the average price that a stock has traded throughout the day based on volume and price. It gives both the trend and value of a stock. Many traders use this indicator to determine intraday trends, and predict whether it is a good time to buy in or sell.

14 Day Volume Weighted Average Price of AT&T
14 Day VWAP of AT&T (T)

4. Moving Average Convergence/Divergence (MACD)

The Moving Average Convergence/Divergence (MACD) is produced by subtracting the 12 EMA from the 26 EMA. It is a momentum indicator that is following the current trend of a stock and can help determine whether the bullish or bearish trend of a stock is strengthening or weakening. Many traders use the MACD to sell when it is above the signal line, or buy when it is below the signal line.

Moving Average Convergence/Divergence of AT&T
MACD for AT&T (T)

5. Relative Strength Index (RSI)

Strength of price action is determined by the Relative Strength Index . Typically, a flat RSI will be at 50, while anything below 30 is considered oversold and anything above 70 is considered overbought. Traders like to buy in when a stock is oversold and shows signs of an uptrend, and usually sell when the RSI is above 70 and overbought.

Relative Strength Index of AT&T
RSI for AT&T (T)

Recap

We have now gone over the 5 most commonly used indicators in technical analysis: MA, EMA, VWAP, MACD, and RSI. There are many different date ranges you can use for these indicators to analyze a stock on a long term basis or short term. You can find plenty of buy and sell opportunities through the use of these indicators. Specific investing strategies using these indicators will be in a future post, so remember to subscribe to get updates when a new post is released!



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