Indicators are vital tools for technical analysis. They are mathematical tools that provide a visual representation of current and past price action in the markets. Some indicators are over-laid on price while others are under-laid on charts.

Traders use indicators to assess elements of price such as:

• Trend
• Volume
• Volatility
• Momentum
• Market cycles

When used well, indicators can help traders identify and confirm market price patterns. Additionally, indicators can also help in picking out optimal entry and exit price levels when trading online.

There are numerous indicators available on many platforms. Here are 8 key online trading indicators to use in your strategy:

 

1. Moving Averages

Moving Averages are one of the most popular technical analysis tools in online trading. They are calculated as the average prices of an asset over time. Their computation ensures that they filter out ‘noise’ or ‘extremes’ in price action.Visually, they are overlaid on price as smoothed-out lines that show how price moves over time. Moving Averages are loved for their simplicity and versatility.

 

How do traders use Moving Averages?

• Trend Direction – If prices are above a rising Moving Average, it implies an uptrend is in place. Similarly, if prices are below a falling Moving Average, it denotes a downtrend.
• Trend Strength – The slope of a Moving Average also gives clues about the strength of a prevailing trend. Generally, the steeper the slope, the stronger and more momentous the underlying trend.
• Moving Average Crossover – When using multiple Moving Averages, traders use the crossover strategy to confirm new trends or reversals. For instance, if a shorter-period Moving Average crosses a longer-period Moving Average from below, it implies that the prevailing downtrend has ended, and an uptrend is starting.

 

2. RSI (Relative Strength Index)

RSI is also a popular technical analysis tool. Known as an oscillator, RSI is used to determine overbought and oversold conditions in the market. The indicator is plotted with values from 0 to 100. There are 2 key lines highlighted on the indicator chart: 30 and 70. A reading of 30 and below implies that the market is oversold. An oversold market denotes seller exhaustion and signals that prices may turn higher. A reading of 70 and above implies that the market is overbought. An overbought market denotes buyer exhaustion and signals that prices may turn lower.

 

How do traders use RSI?

• Overbought and Oversold Conditions – The logic is simple: look to buy when the RSI shows oversold conditions and look to sell when the RSI shows overbought conditions. In trending markets, the RSI can deliver signals when the market corrects. In ranging markets, traders look for signals on support and resistance areas.
• RSI Divergence – A divergence occurs when the RSI and Price are moving in opposite directions. A bullish divergence occurs when the price is falling but RSI is rising. It is a signal that an upward price reversal is about to happen. A bearish divergence occurs when the price is rising but RSI is falling. It is a signal that a downward price reversal is about to happen.

 

3. Stochastic

Another indicator in the Oscillator group, the Stochastic, is also used to determine overbought and oversold conditions in the market. The indicator features two lines (%K and %D). The %K line is plotted using price, whereas the %D line is a Moving Average of the %K line. Like RSI, Stochastic has a reading of 0 to 100. However, oversold and overbought lines are at 20 and 80 respectively.

 

How do traders use the Stochastic indicator?

• Overbought and Oversold signals – A Stochastic overbought (sell) signal occurs when the indicator reading is above 80 and the %K line crosses below the %D line. Alternatively, a Stochastic oversold (buy) signal is provided if the indicator reading is below 20 and the %K line crosses above the %D line.
• The Centreline (50) – Stochastic traders also watch the centreline (50) of the indicator to assess the momentum of the current trend. A momentous bullish trend is highlighted by a Stochastic reading of above 50; whereas a momentous bearish trend is qualified by a reading of below 50.
• Stochastic Divergences – Stochastic divergences provide early signals of possible trend reversals in the market. A bullish Stochastic divergence occurs when the price is edging lower while the indicator drifts higher. It is an early signal to buy. On the other hand, a bearish Stochastic divergence occurs when the price is edging higher while the indicator drifts lower. It is an early signal to sell.

 

4. Bollinger Bands

Bollinger bands are a popular volatility indicator. The indicator features a middle line that is a simple 20-period moving average. There are additional upper and lower bands that are standard deviations of the middle line. Bollinger Bands are designed to contain a price, and it provides a simple graphical illustration of volatility in the underlying market.

 

How do traders use Bollinger Bands?

• Bollinger Bands Squeeze – A Bollinger Bands squeeze occurs when the upper and lower bands contract. It denotes low volatility in the market. Because low volatility periods are followed by high volatility periods, a Bollinger Bands squeeze represents a good opportunity to time breakouts that may be the start of a big trend.
• Mean Reversion – As mentioned, the indicator is designed to contain the price. When the price is way outside the upper or lower bands, it is an opportunity to trade mean reversion strategies with the expectation that the price will revert back to the ‘envelope’ of the bands.

 

5. Pivot Points

When overlaid on a price chart, the standard Pivot Points indicator generates 7 horizontal lines: a middle reference line (PP), 3 support lines (S1, S2 and S3), as well as 3 resistance lines (R1, R2 and R3). These lines are calculated based on the high, low, and closing prices of the previous period. The levels serve as reference areas where traders can watch out for potential changes in market sentiment.

How do traders use Pivot Points?

The Pivot Point levels provide optimal price levels where traders can place buy/sell orders as well as reference levels where they can place their stop loss and take profit areas.

 

6. ADX (Average Directional Index)

The Average Directional Index is used to measure the strength of the underlying trend. The indicator does not show trend direction, but it is used to qualify trade opportunities in the market. It is plotted from 0 to 100. Generally, the higher the ADX reading, the stronger the underlying trend.

How do traders use the ADX indicator?

• Finding Ranging and Trending Markets – Generally, an ADX reading of below 25 implies that there is no definitive trend in the market. This can be a confirmation that the market is ranging. Alternatively, an ADX reading of above 25 indicates that the underlying trend is gaining momentum.
• Confirming Valid Breakouts – Breakouts can be very lucrative opportunities, but only if you find valid ones. A breakout with an ADX reading of above 25 can be said to be valid, whereas a breakout with a reading of below 25 can be considered unsustainable.

 

7. MACD (Moving Average Convergence Divergence)

The MACD is also a popular indicator used to show trend direction and confirm reversals. As its name suggests, it provides a quick visual on crossovers of select moving averages. Visually, it features a histogram as well as two lines: a MACD line and a Signal line. The histogram graphical illustration shows the difference between the two lines, and it oscillates above and below a zero line.

 

How do traders use MACD?

• Traders look to buy when the histogram is above the zero line and to sell when it is below the zero line
• The histogram also gets bigger when a trend is getting stronger, and smaller when a trend is getting weaker

 

8. Fibonacci Retracements

The Fibonacci Retracement indicator is a powerful tool for picking out optimal price levels where you can join an underlying trend. Trending markets rarely move in a straight line, and they often retrace before resuming the trend. When drawn on a chart, the Fibonacci tool generates retracement levels at: 23.6%, 38.2%, 50%, 61.8% and 76.4%. In an uptrend, the retracement levels serve as potential support areas where prices will bounce off to continue the bullish movement. And in a downtrend, the retracement levels will serve as potential resistance levels where prices will bounce off to continue the bearish movement.

The Fibonacci levels can also be used as optimal reference areas for placing both guaranteed and trailing stops.