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Technical indicators are the basis of technical analysis. There are dozens of technical indicators, how to choose good stock indicators? Technical indicators are used to know when to enter or exit a trade. If you know how to enter and exit a trade, you can easily make profits. That is why choosing good stock indicators are important.
Some of stock indicators are more common and useful than others. Also you need a few of them to know when to enter or exit a trade not all off them.
Technical indicators can be divided into four major categorizes:
1- Price Indicators: Oscillators,
3- Number Theories: Fibonacci numbers, Gann numbers
4- Waves: Elliott's wave theory
Price Indicators are computed by prices data. A subcategory of Price Indicators are oscillators. Oscillators are indicators that are usually computed from prices and tend to cycle or “oscillate” within a fixed or limited range.
Common oscillators are: Momentum and Rate of Change (ROC), Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and Stochastic Oscillator.
Momentum and Rate of Change (ROC)
Momentum is an oscillator designed to measure the rate of price change, not the actual price level. This oscillator consists of the net difference between the current closing price and the oldest closing price from predetermined period.
The formula is:
Momentum (M) = CCP – OCP
Where: CCP is Current Closing Price and OCP is Old Closing Price
Momentum is simply the difference, and the ROC is a ratio expressed in percentage. Momentum and Rate of Change (ROC) are simple indicators showing the difference between today's price and the close N days ago. Momentum in general term means strongly movement of prices in a given direction.
Moving Average Convergence/Divergence (MACD)
MACD is computed by subtracting a longer moving average from a shorter moving average. MACD is used with a signal or trigger line, which is a moving average of MACD. If MACD and trigger line cross, then this indicate that a change in the trend is likely. MACD developed by Gerald Appel.
The MACD smoothes data, as does a moving average; but it also removes some of the trend, highlighting cycles and sometimes moving in coincidence with the market .
Relative Strength Index (RSI)
RSI measures the relative changes between up-moves or down-moves and scales its output to a fixed range, 0 to 100. RSI is an oscillator and Welles Wilder devised it.
The formula for calculating RSI is:
RSI = 100 – [100/ (1+RS)]
Where: RS is average of N days up closes, divided by average of N days down closes and N is predetermined number of days that usually chosen 14.
RSI can use as an overbought/oversold indicator. A buy signal is when the RSI moves below a threshold, into oversold territory, and then crosses back above that threshold, usually 30 is taken for oversold threshold. A sell is signaled when the RSI moves above another threshold,
into overbought territory, and then crosses below that threshold, usually 70 is taken for overbought threshold.
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