Learning to use tools such as indicators is essential to operate the financial markets. These allow you to understand more about the price movement of an asset to find better opportunities to buy or sell technical analysis leading indicators.
With the indicators it will be easier for you to understand the behavior of the price of financial assets; well, aspects such as trend and volume are represented more visually thanks to them. This will be useful for you to better detect moments to buy or sell.
So, keep reading and learn more about what indicators are, what types exist and which are the most used by traders.
What are indicators in trading?
An indicator in trading is a mathematical calculation based on the position of the volume or price of a financial asset. This shows you the patterns or trends that the behavior of an asset follows.
Within the world of trading, there is a debate about the two ways that exist to analyze financial markets: technical analysis and fundamental analysis. Some traders believe that one option is better than another; however, I consider them complementary, and which one you should use depends on your strategy and trading style stop loss order.
The fundamental analysis is the one that focuses on the financial information of the companies and other economic factors related to the value of the asset. Technical analysis focuses on observing the behavior of the price of assets with the help of tools such as graphs, bars, and indicators to identify patterns and investment opportunities.
Therefore, if your trading strategy is based more on technical analysis, knowing about the indicators will be very helpful.
Each trader has a preferred indicator, as well as Warren Buffet —one of the most recognized investors—uses “The Buffer indicator”, which is calculated by dividing the Total Valuation of the United States Stock Market by the GDP. Therefore, it will be a term that you will hear constantly and with which you should be familiar.
It is very important that you keep in mind that indicators are confirmation tools, that is, they will help you identify possible trends that asset prices will follow; however, making a correct analysis and developing an objective opinion will determine the entry or exit of your position.
Types of indicators in trading
Trend Following Indicators
Trend-following indicators are a tool used in technical analysis to measure the direction and strength of trends in selected periods.
Volume indicators are used to measure the number of transactions that are made of a certain financial asset. High volumes can indicate that there are a large number of people selling or buying an asset, whether due to positive or negative news.
Volatility indicators are used to measure the constant changes that the price of a financial asset presents. Identifying these periods s of constant movement allows us to know if there is a greater or lesser risk when operating with certain assets. In most cases, a high amount of volatility means higher risk.
Momentum indicators are tools used to determine the price strength of a financial asset, the rate at which a price falls and rises to give signals of overbought or oversold.
How to use trading indicators?
Trading indicators are useful for predicting possible behaviors in asset prices. This means that, with a correct analysis, you will be able to determine whether to hold an asset, buy it or sell it.
Understanding trends will help you identify potential asset directions and find trading opportunities. Depending on the strategy you use, you can define the most convenient periods and graphs for your analysis.
For example, if you are doing Day Trading, you should consider adding volume indicators to your strategy, since volatility for this style of trading is essential tooperator operations on the same day.
Keep in mind that indicators are useful; however, they will not give you total certainty of what will happen in the market, therefore, your analytical and emotional capacity will play a very important role when making a decision.
What indicators to use in your strategy?
As you have seen, there are a large number of indicators and the most important part is knowing how to choose the ones necessary for your trading style and strategy. It will also depend on the market you are operating in and the behavior of financial assets.
Understanding the types of indicators and how to use them will give you a huge advantage when trading the market. At MDC Trading Academy we have expert traders, who, like me, are highly trained to guide you on technical analysis issues.
Join our Senior Trader course to learn how to use indicators, determine how to set them up on your charts, and how leverage the information they give you to find the best buying and selling opportunities.
Do not hesitate any longer and start your path as a professional trader and achieve all your financial al goals. We will be happy to accompany you in all your development and learning!