Education Technical Analysis

Stock Trading-Technical Analysis Tools Used

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If you are not trained, then be warned that day trading is a risky affair. However, if you have a good eye for identifying market trends, you will make profits. Knowing technical analysis indicators will come in handy.

Back in the day, stock trading was a more simplified game of selling and buying. Now, it is anything but simple. Technical analysis is the science and art of anticipating forthcoming prices from previous price movements.

Top technical analysis tools used 

The following are technical analysis indicators that are widely used in trading stock:

OBV Indicator (On-Balance-Volume)

This indicator is used to measure the negative and positive volume flow in security for some time. It is thus a momentum indicator measuring the negative and positive flow of volume.

According to its developer, a sharp volume increase without significant stock price change means prices will, in time, jump up. A sharp decrease in volume without a substantial stock price change means there’ll be an eventual price jump downwards.

OBV Calculation

  • If the previous day’s closing price is lower than today’s closing price: Today’s OBV = Yesterday’s OBV + today’s volume.
  • If the previous day’s closing price is higher than today’s closing price: Today’s OBV = Yesterday’s OBV – today’s volume.
  • If the previous day’s closing price is equal to today’s closing price: Today’s OBV = Yesterday’s OBV.

Interpretation

The Granville theory states that an OBV rise positively reflects volume pressure, and this can cause higher prices. On the other hand, a falling OBV price negatively reflects volume pressure, and this can causes lower prices. As such, it’s worth noting that OBV will often move ahead of prices.

A/D Line (Accumulation/Distribution lie

Accumulation or distribution are technical analysis indicators frequently used to determine the flow of money out and security. Marc Chaikin developed this indicator to measure cumulative money flow, and it was previously known as the Cumulative Money Flow Line.

It is an indicator that tries to gauge demand and supply by determining if an investor is selling (distribution) or buying (accumulating) a stock.

A/D Line Calculation

  • Money flow indicator: (close – low) – (high – close)
  • The resulting value is then divided as shown: close – low) – (high – close) / (high – low)
  • The final number is now the money flow number.

Interpretation

A/D can move in the same direction that price is moving in. It can alternatively have a reverse slope. If the price of a security has a downward trend and the A/D line has an uptrend, indicators will show possible buying pressure, resulting in a price reversal. Similarly, if the price of a security is in an uptrend and the A/D line is in a downtrend, the indicator will show possible selling pressure, which may cause price reversal.

Aroon

This indicator is used to determine if the security is in trend and tells a likely change of direction. This indicator also measures the duration for the price to reach its lowest or highest point over a given timeframe.

The Aroon indicator is made of the “Aroon down,” which measures a downtrend’s strength, and the “Aroon up” line measures an uptrend’s strength.

Aroon calculation

  • Aroon down:

((N – Days Since N-day Low) / N) x 100

  • Aroon up:

((N – Days Since N-day High) / N) x 100

Interpretation

These three stages are used in identifying uptrend signals:

l Cross of the aroon line.

l Crossing pf the Aroon line below or above 50

l One line reaches 100.

Parabolic SAR

Also called the “stop and reverse system,” this indicator is used to determine a security’s price direction. It is also used to determine a change in price direction. It’s graphically shown on a security chart as dots placed below or above the price. If there’s a downtrend, there’ll be a dot on top of the price, and in an uptrend, the dot will be placed beneath the price.

Conclusion

The above are some of the many technical indicators available and used by traders worldwide. It’s best to be conversant with as many indicators as possible before using them. As earlier mentioned. Technical analysis indicators are useful in earning profits. The best part is that you have the option of using even three indicators at a go when you’re selecting stocks.

 

If you are not trained, then be warned that day trading is a risky affair. However, if you have a good eye for identifying market trends, you will make profits. Knowing technical analysis indicators will come in handy. Back in the day, stock trading was a more simplified game of selling and buying. Now, it…

If you are not trained, then be warned that day trading is a risky affair. However, if you have a good eye for identifying market trends, you will make profits. Knowing technical analysis indicators will come in handy. Back in the day, stock trading was a more simplified game of selling and buying. Now, it…