Technical Analysis: Which Indicator Will Inform Your Trading Strategy Today?

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In this guide, we explain what technical analysis is and how it serves traders to create and execute trading strategies. We also provide quick overviews to each major chart type, how they’re used, and links to detailed tutorials.

What Is Technical Analysis?

Technical analysis is a trading strategy using charts and statistics to analyze patterns in market data to predict future trends.

Many traders speculating on commodities and other instruments use technical analysis. These tools can be used when trading CFDs, forex, options, stocks, cryptocurrencies, and instruments alike.

Bollinger bands
Bollinger bands by Albert Callisto via CC BY-SA

Does technical analysis work?

Technical analysis is a skill that uses a set of learned formulas and tools that are key to a trader’s toolbox. As with most skills, the tool is not as important as the person who uses it.

Although some feel that technical analysis is unreliable at best and junk science at worst, some traders find success with it. Success with technical analysis depends on a trader’s ability to use the learned tools.

What Are the Different Types of Technical Indicators?

Broadly speaking, technical indicators can be grouped into the following categories: Bands, Candlesticks, Exponential, Fibonacci, Indices, Momentum, Moving Averages, Oscillators, Regression, Support and Resistance, Trends, Volatility, and Volume.

Some indicators can fall into more than one category like VIX (Volatility + Index), and some categories can overlap with each other (like Moving Averages and Volume).

The following is a detailed index to common technical analysis indicators, patterns, and tools.

Bands: Finding Moving Averages

Bands are one of the most popular technical analysis tools. They can help traders find patterns in moving averages.

  • Bollinger Bands (BB) combine moving averages with standard deviations. Playing the Bollinger Bands, BB breakouts, and option volatility strategies.
  • Standard Error Bands can illuminate trend direction and price volatility.

Candlesticks: Directional Tools

Candlestick price charts can help traders more easily visualize price movements.

candlestick chart
Candlestick Chart by Albert Callisto via CC BY-SA

Popular Candlestick Analysis Methods

The following guides explain the basics of candlestick analysis and how traders can apply them in action.

  • Candlestick Basics – If the closing price is above the opening price, then candlestick is bullish.
  • Bearish Engulfing – When new highs are rejected and the bears push prices below yesterday’s low.
  • Bullish Engulfing – When new lows are rejected and bulls push prices above yesterday’s high.

Candlestick analysis methods can be broken down into bearish or bullish patterns.

Bearish Candlestick Patterns: Betting On A Price Drop

These candlestick patterns can be used to indicate a coming downtrend in commodity or stock price.

  • Dark Cloud Cover features a bullish pattern on day one and a bearish pattern on day two.
  • Evening Star is a bearish reversal pattern that occurs at the top of an uptrend.
  • Hanging Man is a bearish warning of a potential price change that occurs mainly at the top of uptrends.
  • Harami is a reversal pattern that can be either bullish or bearish.
  • Shooting Star is a bearish reversal created when the open, low, and close are roughly the same price.
  • Tweezer Top consists of two candlesticks that are a bearish reversal pattern seen at the top of uptrends.
  • Windows (Gaps) is a bullish or bearish pattern that means that no price and no volume transacted hands between the gap.

Bullish Patterns: Betting On A Rise In Price

These candlestick patterns indicate an uptrend in prices. Some of them are also used to indicate potential downtrends.

  • Dark Cloud Cover features a bullish pattern on day one and a bearish pattern on day two.
  • Hammer is a bullish reversal that occurs at the bottom of downtrends.
  • Harami is a reversal pattern that can be either bullish or bearish.
  • Inverted Hammer occurs mainly at the bottom of downtrends and can act as a warning of a potential reversal upward.
  • Morning Star is a bullish reversal pattern, usually occurring at the bottom of a downtrend.
  • Piercing Pattern is a bullish pattern similar to the Bullish Engulfing Pattern.
  • Tweezer Bottom consists of two candlesticks that are a bullish reversal pattern seen at the bottom of downtrends.
  • Windows (Gaps) is a bullish or bearish pattern that means that no price and no volume transacted hands between the gap.

Chart Patterns: Regular Readings

Chart patterns are standard practice among technical analysts and can be read relatively quickly once understood.

Double-top chart pattern

Many of these indicators are based on support and resistance.

  • Double Bottom – Breakout of upside resistance, uses support and resistance concepts.
  • Double Top is a common and highly effective price reversal pattern.
  • Flag is a continuation pattern, showing breakouts above consolidation or breakouts below support.
  • Head & Shoulders – Prices might fall below support created by left shoulder and head.
  • Support & Resistance – Support is an area where historically buyers have stopped further price decreases, resistance is where sellers typically stop further price increases.
  • Triangle Continuations show a price consolidation period consisting of higher lows and lower lows, forming the shape of a triangle.

Doji Candlesticks: Market Reversals

Doji candestick chart

Doji is a transitional candlestick formation signifying equality or indecision between bulls and bears.

  • Doji can be found at the bottom and top of trends and can be viewed as a possible reversal or as a continuation pattern.
  • Dragonfly Doji is created when the open, low, and close are the same or about the same price and has a long upper shadow.
  • Gravestone Doji has a long lower shadow.

Exponential Charts: Rate Of Change

Exponential charts differ from linear charts.

Triple exponential average index

The rate of change over time increases by a consistent multiplier rather than being a constant rate of change.

Fibonacci Charts: Directional Speculation

The Fibonacci sequence is a mathematical pattern found in nature and financial markets.

Fibonaci fan

Each number is the sum of the two preceding ones, often visualized as a spiral graph.

  • Fibonacci Arcs are percentage arcs based on the distance between major price highs and price lows.
  • Fibonacci Fans use Fibonacci ratios based on time and price.
  • Fibonacci Retracements is the most heavily used Fibonacci tool based on the logic that the S&P 500 is a broad measure of human nature.
  • Fibonacci Time Extensions are used to predict periods of price change for both highs and lows.

Index Charts: Market Conditions

Indicators like the RSI are used to assess the overall market conditions, anywhere from volatility to overbought and oversold thresholds. They’re often used to determine entry and exit points in trading strategies.

relative strength index (RSI)
  • Accumulative Swing Index (ASI), developed by Welles Wilder, is used as a divergence and confirmation tool.
  • Arms Index (TRIN) is a volume-based confirmation indicator as well as being an overbought or oversold indicator.
  • Average Directional (ADX) describes whether a market is trending or not.
  • Commodity Channel Index (CCI) is a popular indicator that attempts to interpret buy and sell signals and can identify overbought and oversold areas of price action.
  • Commodity Select Index (CSI) was intended by Welles Wilder to indicate be used to select the best commodity to trade by weighing the volatility \the best risk-reward setup.
  • Directional Movement Index (DMI) consists of two lines, the DMI plus line (DMI+) and the DMI minus line (DMI-), which generate potential buy and sell signals.
  • Herrick Payoff Index (HPI) uses volume, open interest, and price to signal bullish and bearish divergences in the price of a futures or options contract.
  • Mass Index is used to warn of a future price reversal when volatility is high.
  • Money Flow Index (MFI) is helpful in confirming trends in prices and warning of potential reversals in prices.
  • Relative Strength Index (RSI) is an oscillator that measures current price strength in relation to previous prices.
  • Swing Index attempts to predict future short-term price action when it crosses over or under zero.
  • Ulcer Index attempts to measure the “stress” of holding a trade or investment by measuring price retracements.
  • Volatility Indexes ($VIX and $VXN) are 30-day annualized volatility indices for the S&P 500 Index Options and NASDAQ 100 Index Options, respectively.

Linear Regression: Sequential Analysis

Linear regression models are mathematical models that attempt to describe the relationship between two numbers.

Linear regression curve

In linear regression analysis, a set of factors attempts to predict the occurrence of another.

Moving Averages: Finding Outliers

Moving averages are used to smooth out short-term noise from long-term trends.

Simple moving average index

Moving averages can be useful to notice unlikely market behaviour.

Oscillators: Market Saturation Analysis

Oscillators can help traders find short-term overbought or oversold conditions.

Oscillator index

Oscillators find such supply and demand key points by tracking prices over time within a band, both above and below a centerline.

  • Aroon Indicator/Oscillator helps traders know when a market is up-trending, down-trending, or is in a range-bound, trendless market.
  • Chaikin Oscillator (or Volume Accumulation Oscillator) may be used to confirm price movement or divergences in price movement.
  • Commodity Channel Index (CCI) is a popular oscillator that attempts to interpret buy and sell signals and can identify overbought and oversold areas of price action.
  • Detrended Price Oscillator attempts to filter out trends in order to focus on the underlying cycles of price movement.
  • MACD – How it’s constructed, moving average crossovers, MACD histogram, and divergences.
  • McClellan Oscillator uses advancing issues and declining issues on the New York Stock Exchange (NYSE) to gauge market breadth.
  • Price Oscillator calculates the difference between the two moving averages.
  • Rate of Change (ROC) compares the current price to a past price and is used to confirm price moves or detect divergences.
  • Relative Strength Index (RSI) is an oscillator that measures current price strength in relation to previous prices.
  • Ultimate Oscillator combines short-term, intermediate-term, and long-term price action into one oscillator.
  • Volume Oscillator consists of a fast-moving average subtracted from a slow-moving average.

Price Movements: Value Indices

Price-volume index

These technical indicators focus solely on price changes over time.

  • Detrended Price Oscillator attempts to filter out trends in order to focus on the underlying cycles of price movement.
  • Price Channels suggest possible buy and sell signals based on price breakouts.
  • Price Oscillator calculates the difference between the two moving averages.
  • Price Volume Trend combines percentage price change and volume to confirm the strength of price trend.

Stochastic Indicators: Price Deviation

When describing technical indicators, the term “stochastic” refers to a current price in relation to its price range over a period of time.

Stochastic index

Stochastics can be used to indicate relevant deviations from the historical ‘normal’ price range of an asset.

  • Stochastics (Fast and Slow) may be helpful in detecting price divergences and confirming oversold and overbought areas.
  • Stochastic RSI combines two popular technical analysis indicators: Stochastics and the Relative Strength Index (RSI).

Volatility: Movement Intensity & Price

Volatility indicators are based on the idea that strong upward trends are marked by decreases in volatility, while strong downward trends show a general increase in volatility.

Volatility index

Here are some volatility analysis tools to get you started:

  • Volatility Indicator may be helpful in seeing potential market reversals based on the true range of price or in determining strong trends and price bottoms.
  • Volatility Indexes ($VIX and $VXN) are 30-day annualized volatility indices for the S&P 500 Index Options and NASDAQ 100 Index Options, respectively.

Volume Indicators: Market Activity

Volume indicators are based on the generalization that volume increases every time a buyer and seller transact their stock or futures contract.

Volume index
  • On Balance Volume (OBV) combines price and volume in an attempt to determine whether price movements are strong or weak.
  • Price Volume Trend combines percentage price change and volume in an attempt to confirm the strength of price trends or to warn of weak price movements.
  • Volume can indicate higher or lower prices correlating with the amount of trading volume.
  • Volume Accumulation combines volume and a price-weighting to show the strength of conviction behind a trend.
  • Volume Oscillator consists of a fast-moving average subtracted from a slow-moving average.
  • Volume Rate of Change measures the percentage change of current volume as compared to the volume in the past.

Additional Technical Indicators

The following technical indicators are difficult to categorize as they serve a mixture of analysis functions.

MACD
The MACD provides insight on factors like moving averages and divergences.

Explore the following guides to learn more about what each tools can do for you as a trader:

  • Accumulation Distribution uses volume to confirm price trends or warn of weak movements that could result in a price reversal.
  • Advance-Decline Ratio is used to confirm price movement and detect divergences.
  • Andrews Pitchfork (also known as Median Line Studies) utilizes the concepts of support levels, resistance levels, and retracements.
  • Elliot Wave Theory states that prices move in waves of repeating patterns.
  • Gann Theory is based on the premise that prices move in predictable patterns.
  • Keltner Channel is used to signal possible price breakouts, show trends, and give overbought and oversold readings.
  • MACD – How it’s constructed, moving average crossovers, MACD histogram, and divergences.
  • Market Thrust Indicator is a measure of the stock market’s internal strength or weakness.
  • Momentum compares where the current price is in relation to where the price was in the past.
  • Open Interest (OI) is the number of contracts outstanding in the marketplace.
  • Options Strategies are an entire set of technical indicators that are used to predict whether to buy or sell options.
  • Parabolic Stop and Reverse (SAR) combines price and time components in an attempt to determine when to place stop-loss orders.
  • Point and Figure Charting reduces the importance of time on a price chart and instead focuses on price movements as Xs and Os.
  • Rate of Change (ROC) compares the current price to a past price and is used to confirm price moves or detect divergences.
  • Time Series Forecast calculates a best-fit line over a designated time frame in an attempt to predict future trends.
  • Williams %R is an overbought and oversold technical indicator that may offer potential buy and sell signals.
  • Zig Zag attempts to determine price trends, support and resistance areas, and classic chart patterns using swing highs and swing lows.

Technical Trading Broker Platforms

Modern brokerages offer technical analysis tools built into their trading platforms and mobile apps, and many offer free demo accounts.

Start your research with reviews of these regulated brokers available in to see what technical analysis tools they offer traders.

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Please Note: Availability subject to regulations. Cryptocurrency CFDs are not available to UK retail traders.

FAQs

What is the difference between technical analysis and fundamental analysis?

Technical analysis tools and techniques focus on determining potential price movements, namely, the direction, intensity, and likelihood of those price movements. Fundamental analysis techniques are designed to gain insight on the market’s overall condition to determine the stock’s actual value versus the price it trades at — volume analysis techniques are both fundamental and technical.

What are the best technical analysis indicators?

Although there is no one best or foolproof technical indicator, some are more popular than others. The most-used indicators include Bearish and Bullish Engulfing, Bollinger Bands (BB), Candlesticks, Commodity Channel Index (CCI), Doji, Double Top and Bottom, Exponential Moving Average (EMA), Fibonacci Retracements, Flag, Head & Shoulders, MACD, On Balance Volume (OBV), Relative Strength Index (RSI), Simple Moving Average, Stochastics (Fast and Slow), and Support & Resistance Levels.

What are the methods of technical analysis?

Technical Analysis involves methods that derive from mathematics, behavioral science, and economics. Mathematics is used to create quantitative forecasting models from price, volume, and other market data. Behavioral science allows for insights into the human behaviors which drive buy/sell decisions. Economics describes how economies behave on a macro or micro level. 

How often is technical analysis correct?

Technical analysis is not a prediction process, nor is it a guaranteed-success strategy maker. Technical analysis tools provide insight on market conditions and allow traders to get closer to a desired position. The trader’s accuracy and finesse to use these tools effectively determines the accuracy of the speculation of an asset’s price.

What is a trend line in technical analysis?

A trend line is a straight line used in technical analysis to connect price points on a price chart. It is a visual representation of the historical relationship between these price points and is often used as a tool to speculate on the future relationship based on historical data. Support and resistance levels are similar in terms of function.

How many technical analysis indicators are there?

There are dozens of technical indicators with more being tested all the time. At Commdoity.com we describe over 90 different technical indicators and explain how to use them with examples. The most popular technical indicators include Bollinger bands, candlesticks, Doji, MACD, CCI, EMA, and Fibonacci retracements.

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