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What are the top 5 trading indicators and what do they mean?
Average True Range (ATR)
The Average True Range (ATR) is used to calculate and measure volatility, which is undeniably important from an investor’s point of view. Most popular indicators are used to predict the price of any given security; however, ATR is useful as it measures not only general volatility, but also volatility directly resulting from limit moves or price gaps. ATR has been a popular trading indicator since 1978, when it was created by J. Welles Wilder in his book, New Concepts in Technical Trading Systems. ATR is highly useful in measuring the strength of a move. For example, if the price of any given security changes, there is typically an increase in volatility. Comparative to the price change, ATR can be used to gauge the strength of the price change. It can also be used during periods of low volatility, as investors can utilize it to identify trading ranges.
The Relative Strength Index (RSI)
To understand the Relative Strength Index (RSI), we must first understand what an oscillator is. An oscillator is a tool used in technical analysis that formulates high and low bands between two extreme values, and then subsequently moves within these figures. Oscillators are generally used to identify overbought or sold securities in the short term. The Relative Strength Index (RSI) is a momentum-based oscillator that measures the velocity/speed and change/magnitude of price movements. This allows investors to see the current and historical strengths and weaknesses of any given market. These points are calculated by numerating the closing prices throughout the duration of any given trading period, which tracks price fluctuations and velocity changes. This indicator was also created by J. Welles Wilder.
The Moving Average Convergence/Divergence (MACD)
The Moving Average Convergence/Divergence (MACD) can be utilized to identify various aspects of any given security’s overall trend. Those most typically identified by investors that use MACD are momentum, trend direction, and trend duration. The MACD is uniquely informative as it allows investors to combine indicators and plot them in a histogram. The MACD plots any two moving averages against trend direction and duration, taking the difference between the figures and indicating the momentum of the security.
The Ichimoku Cloud
The Ichimoku Cloud is a group of indicators that display the resistance levels, momentum, and trend direction of any given market. The Ichimoku Cloud was created by Japanese journalist Goichi Hosoda. Because it includes multiple data points and lines, it is often associated with being used by more experienced traders, though it is a key tool for those who can interpret it. The Ichimoku Cloud takes a variety of averages, plots them on a chart, and computes a cloud that allows investors to forecast where a market or security may face resistance or garner support in the future.
The Exponential Moving Average (EMA)
The Exponential Moving Average (EMA) is a weighted moving average that places a greater weight on the more recent data points in the data set. It does this by using old data points as multipliers to the most recent in the series, producing buy and sell signals based on divergences from the current and historical data. Different examples of the Exponential Moving Average (EMA) in widespread use include 10-day, 50-day and 200-day moving averages.
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