What are technical indicators in stock trading?

Technical indicators are mathematical calculations based on a stock’s historical price and volume patterns. Traders use these indicators to analyze market trends and predict future price movements. Technical analysis relies on various indicators to help investors make informed decisions about when to buy or sell a stock.

1. Moving Averages

Moving averages smooth out price data to create a trend-following indicator. There are two common types: Simple Moving Average (SMA) and Exponential Moving Average (EMA). Moving averages help identify the direction of the trend and potential reversal points. A stock trading above its moving average is generally in an uptrend, while trading below it indicates a downtrend.

2. Relative Strength Index (RSI)

The RSI is a momentum oscillator that measures the speed and change of price movements. It oscillates between 0 and 100 and is typically used to identify overbought or oversold conditions. An RSI value above 70 suggests the stock may be overbought, while a value below 30 suggests it may be oversold.

3. Moving Average Convergence Divergence (MACD)

The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price. It consists of the MACD line, signal line, and histogram. When the MACD line crosses above the signal line, it generates a bullish signal, and when it crosses below, it generates a bearish signal.

4. Bollinger Bands

Bollinger Bands consist of a middle band (SMA) and two outer bands that represent standard deviations away from the middle band. The bands expand and contract based on volatility. When the price touches the upper band, it may signal overbought conditions, while touching the lower band may indicate oversold conditions.

5. Stochastic Oscillator

The stochastic oscillator is a momentum indicator that compares a stock's closing price to its price range over a specific period. The oscillator moves between 0 and 100. A reading above 80 suggests the stock is overbought, while a reading below 20 indicates it is oversold.