M4 Technical Indicators

An indicator is a series of data points that are derived by applying a mathematical formula to the price data of a security.

Reduce the subjectivity in analysing markets since the application of technical indicators involves looking at derivatives of price and volume, rather than the chart itself.

Consequently, they offer a different perspective from which to analyse price action even though they really only serve to confirm what is already evident on a chart.

When used in isolation they can be inconsistent and often result in late or false signals.

Form read - be able to read charts and apply classical analysis techniques. Unless one can form read, technical indicators will be of little value over the longer term.

1. Trend Following Indicators;
2. Momentum Indicators; and
3. Oscillators

Commonly known as moving averages they measure the change in price over 'n' number of periods and as such follow the movement or trend of the price.

They are lagging indicators - the signal they provide to identify a trend lags behind the trend change itself, therefore the indicator gives the trader late signals.

Although many traders use moving averages as a primary entry and exit signal, because of its tendency to provide false signals it is better to use it as a confirmation tool only.

A basic oscillator that simply measures the rate of change in price or the speed at which price is changing.

To trade sideways markets - consequently as price rises and falls within a defined range, the oscillator tends to rise and fall within a range.

Momentum is calculated using the price today minus the price 'n' number of periods ago. The resultant line graph is plotted around a zero axis. When extreme levels of momentum are reached above the zero line the market is overbought and when extreme levels are reached below the zero line the market is oversold. Momentum seems to develop in these extreme areas indicating the possible end of a significant move, which enables the trader to look for turning points in the trend.

An oscillator basically measure the rate of change or speed of the price move, regardless of the direction of the market (this is essentially what a trend line does).

However, unlike a trend line, the oscillator moves above and below a central axis called a zero line. When the oscillator is above the zero line, the market should be trending up, and when it is below the zero line, the market should be trending down.

Because it really only confirms what is already evident in the chart.