Analysing the performance of an asset is a crucial step in investing. Technical and fundamental analyses, two of the most popular types of evaluations, offer investors the insights required to evaluate investments and identify trading opportunities. An algo trading online course helps investors understand the basic concepts of investing and how to execute profit-making strategies.
Here, we take a detailed look into technical analysis and how it can be used to determine future market movements. For more information on how technical analysis can be used in conjunction with other trading indicators, enrolling in trading courses will provide you with the necessary knowledge from industry experts.
Technical analysis: an introduction
Technical analysis refers to the heuristic study of pattern-based signals of an asset. Essentially, it involves the analysis of historical data like price, volume, interest, etc., to predict future price movements. Technical analysts refer to these indicators to judge profitable entry and exit points to conduct their trades.
Often, technical analysis is used in conjunction with other indicators as it only provides historical data that can be interpreted subjectively. For instance, bearish trends for one investor can also be a suitable entry point for another. Intrinsic value is reflected in the fundamental analysis of an asset and seasoned investors will look at multiple indicators to judge its profitability.
Given their quantitative nature, technical indicators can be incorporated into algorithmic trading systems. Algorithmic trading courses can help individuals willing to try algo trading understand the various concepts of technical analysis and use these indicators to identify potential trading opportunities.
Technical indicators can be broadly classified into two categories, which are discussed in brief below.
- Overlays: As the name suggests, overlays are placed on the price section of the stock chart and use the same scale.
- Oscillators: These indicators “oscillate” between a local minimum and maximum. Oscillators are placed above or below a price chart.
Since there are several technical indicators available to traders, it is on the investor to find and choose the indicator that works best for them. They need to familiarise themselves with the various patterns a technical indicator follows and come up with trade ideas. For advanced moves in the trading world, enrolling in an online trading course can be of immense help.
Types of technical indicators with examples
Depending on their function, there are four types of technical indicators, i.e., trend follows, oscillators, volatility, and support/resistance. Here is a brief description of each of them with some of the most common examples from each category.
- Trend indicators
As the name suggests, trend-following indicators suggest uptrends or downtrends in the average price of a currency pair based on historical averages. The most followed trend indicator is the Moving Average (MA), which averages the price of a currency pair over a period of time and gives a clearer sign of what direction the pair is moving.
Other popular trend indicators include the Average Direction Index (ADX) indicator, which tells if the price is trending or ranging for trading on current market conditions, and the Ichimoku indicator, which is a standalone indicator that shows current trends and levels of support and resistance.
- Oscillator indicators
Oscillator indicators provide insights into the momentum of a specific currency pair. Oscillators mimic the price direction, i.e., when the price is high, oscillators move higher and vice versa. When they reach a maximum price level, investors expect a price turn back close to the mean price. However, oscillators can stay at extreme levels for a while and it is smart to wait for valid price turn signals before trading.
An algo trading online course can help you learn more about the most popular oscillator indicators like the Relative Strength Index, a massive part of which is the ratio between average loss and gain over the last 14 trading periods. Or, you can learn about the Stochastics indicator, which tracks the deviation from the last X trading periods, or the Moving Average Convergence/Divergence, which tracks the difference between two EMA lines.
- Volatility indicators
As the name suggests, volatility indicators measure the fluctuations of a currency pair in a given period. If the fluctuations are too wild in both directions, the asset is said to have high volatility. On the other hand, if the fluctuations are mild, the asset has low volatility. Algo trading courses will provide detailed information on asset allocation and how to balance a portfolio with high and low-volatility assets.
Bollinger Bands indicator is one of the most popular volatility indicators in use today, which can be used universally across multiple types of assets and currency pairs irrespective of the market and their behaviour. The Average True Range indicator tells the average distance between the low and high prices over the last set of bars.
- Support/resistance indicators
Support and resistance are two of the key concepts of technical analysis. Support indicates a price point below the market levels showing buying interest, while resistance indicates a point above the market levels showing selling interest. Support/resistance indicators are crucial technical indicators in the sense they provide an insight into which direction the price will be pushed going forward.
In a high frequency trading course, you will learn about pivot points, which is one of the most widely used technical indicators across several asset classes. Donchian channels (aka price channels) are also used to tally the recent price with the highest and lowest prices in a given time period.
Technical indicators provide statistical insight into the probable future price directions by studying and analysing historical price patterns to predict profitable entry and exit points for trading. These indicators work by creating a series of data points in time to create valid reference points, which can be then used to compare the current and past price levels and predict the future direction. There are several technical indicators that provide a unique set of information and can be used to make smart investment decisions. However, not all indicators are perfect for each trader, so it is on the investor to try and familiarise themselves with multiple indicators and find one that works the best for themselves.
An algo trading online course will help investors gain the insights necessary to use technical indicators in tandem with other types of indicators when analysing the performance of an asset. Seasoned traders will use technical analysis with more subjective forms of analysis like fundamentals and price patterns to come up with trade ideas. For instance, while fundamental traders use fundamentals to pick stocks, they also use technical indicators to find precise, low-risk entry points for their trade.