Many trader use technical indicators in their trading decisions. There are now many technical indicators that are now availabe. Every trader has got a few of them in their arsenal. It is always prudent to not let the number of indicators in your toolkit to exceed more than three or four. Overtime, every trader develops his or her own list of indicators.
The truth about indicators is that they can only analyze historical data. Their effectiveness is therefore limited and sometimes very misleading. What you need to learn is the master a few technical indicators in such a way that you know their strengths and weaknesses in depth. What this means is that you can interpret the trading signals and by looking at the market, know whether the trading signal generated by the technical indicator is relevant or not. We can divide technical indicators into the following broad categories:
Average Based Indicators: Average based technical indicators are the most simple to use. These average based indicators are widely used by traders in almost all markets whether it be stocks, forex, futures, options, commodities and others. The average is calculated on the past data depending on the time frame chosen by the trader. This is a typical lagging indicator that trails the market. This indicator cannot look ahead and anticipate. So, you need to use it in conjunction with other indicators. A combination of lagging and leading indicators can give highly effective signals. But always keep this in mind, there will always be some room for error with these indicators.
Fibonacci Based Indicators; These indicators are very popular and are being used wiodely by all sorts of traders in their trading. These are real leading indicators that can look ahead of the price action and anticipate the new direction of the market. Fibonacci Retracements, Fibonacci Extensions and Fibonacci Projections that the three type of indicators that are used widely by traders. But even this is an art. Some trader become experts in making sense out of the Fibonacci levels otherwize never learn how to master these indicators. Combination of Fibonacci and Pivot Point Trading can be very powerful. Now, when a lot of people start using the same thing. Markets tend to reflect that thing and it looks as if the markets also do believe in such things after all. Just remember, markets are just people buying and selling. These overbought and oversold levels are just the reflection of the emotions that people show in their trading. So, markets also beleive in what you beleive!
Trend Based Technical Indicators; Trend based indicator is one of the simplest. It is formed by drawing a ling that connects the high highs in the price action if it is an uptrend or the low lows in the downtrend. Trendlines can give you an important clue as to the support and resistance. There is something even more accurate than the trendline. It is the trend wall. You need to know all this stuff if you are really serious about learning trading.
Chart Patterns: There a number of chart patterns like the reactangles, triangles, flags, parallelograms and other that are also used as indicators. Most of them are however inaccurate when used solely. You need to learn how to use them in conjunction with other indicators if you want to rely on them in your trading decisions.
Divergence Based Technical Indicators: Divergence based technical indicators are highly popular and to tell you the truth quite reliable if you used them in conjunction with other indicators
Learning technical analysis and mastering these technical indicators are must for you if you want the edge that can make you a winning trader! Without learning technical analysis, you should forget about trading!
by: Ahmad Hassam
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard. Take a look at this Stock Trading Course & get a FREE Technical Indicator that can trade even in the most nervous market. Try this 1500 pips a day Strignano's Forex Signal Service. One new member made $15,000 in just 24 hours. Get the best forex training and mentoring from Tom Strignano- an EX CHIEF CURRENCY TRADER.