Welcome to the new module. We are moving away from the chart patterns from the previous module and are now starting a new series on technical indicators. We will take a look at what technical indicators are and how traders use them in their trading. Let’s call this article a technical indicator introduction.
Technical indicators are basically mathematical formulas that use price action and/or volume to provide information. The indicator displays this information on the chart we use them to predict future price action on the Dax. A trader will often use a technical indicator in addition to technical analysis. This combination can be a powerful tool to assist a trader with making a decision.
There are two types of technical indicators; leading and lagging indicators.
A leading indicator will try and signal future price action. The often generate lots of buy and sell signals because most of these indicators gauge price momentum from relatively recent price data. For this reason, they are most effective in range bound markets. The downside to leading indicators is that they can generate many false signals. The benefits are that when it is correct, you get in very early.
Lagging indicators other hand help you understand where the market has been and where it’s likely to go as a result of that. These indicators are normally used by trend followers and offer little value in range bound markets. The downside to lagging indicators is that they generate far fewer signals than a leading indicator and it will get you into a move much slower than a leading indicator. The benefit is that you receive far fewer false signals.
One of the biggest issues with technical indicators is deciding how sensitive to make the indicator to price action. The less sensitive it is, the less likely you catch false trading signals. However, you are more likely to catch the move late or to miss the move entirely. The more sensitive it is, the more likely you are to get into the move and catch it early. However, you get more false trading signals.
So over the course of this module, we will be looking at a number of most common technical indicators such as; moving averages, MACD, RSI, Stochastic, Bollinger Band, ADX, Parabolic SAR and Fractals.