Different types of technical indicators

Introduction to common technical indicators

Technical analysts view indicators as a great tool that gives traders a new outlook on the markets. These indicators work like market translators; they allow traders to receive important insights that will help them to fine-tune their strategies and provide an edge.

In their core, technical indicators are based on mathematical formulas derived from price movements; therefore, they are completely reliant on data. They are also helpful in identifying market conditions and the best timings to enter or exit trades.

Technical indicators can be categorised into three main types: trend, oscillator, and volume indicators. Understanding and effectively using technical indicators can enhance a trader’s ability to make informed decisions. By combining these tools, traders can gain a more comprehensive view of price trends and market conditions.

In this article, we’ll explain the differences between these indicators and introduce popular tools from each category.

Trend indicators

Trend indicators help traders to ascertain the direction in which the market is heading. These kinds of indicators are usually calculated from the averages of previous price actions, hence forming a smooth line that makes spotting trends easier. In a more general sense, the saying goes, "A trend is your friend," so trend indicators hold a lot of relevance for those traders who follow the trends.

Popular trend indicator: Moving Average

One of the most common indicators used to catch trends is a moving average. It calculates the average price of an asset over a specific period and then overlays a moving line, forming a smooth line on the chart that outlines the general direction of the market. Moving averages help to smooth out noise and highlight the prevailing trend in the market.

Oscillator indicators

Oscillator indicators calculate the strength and momentum of a trend, hence usually moving between set levels, showing the cyclical highs and lows of the market. Oscillators are especially useful in spotting and confirming overbought and oversold conditions, and to disclose potential reversals or continuous movements.

Popular oscillator indicator: Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a popular momentum oscillator that measures the speed and change of price movements. It oscillates between 0 and 100. RSI readings below 30 suggest that the market is oversold, while readings above 70 suggest it’s overbought. Traders often use the RSI as an instrument to define potential reversal points and to gauge the strength of ongoing trends.

Volume indicators

Volume indicators give a measure the volume of trading activity, which indicates market interest and level of participation. In stock trading, this is a highly valuable piece of information as it describes the number of shares that are traded during a certain period. In the forex market, however, volume is determined by the number of times the price changes during a specific period, which reflects the level of activity of investors.

Popular volume indicator: Volume Profile

The Volume Profile is a volume-at-price indicator that visualises the number of trades executed at a particular price level over the selected time period. The Volume Profile is quickly becoming a standard part of any trader's toolkit because it provides traders with the ability to identify key areas of trading activity, which in turn helps them identify important support and resistance levels.