Market moves because of Fundamental factors, Psychological aspects and sentiments. For short term trading the later two i.e. psychology and sentiments play a big role. Short term trading is not just the fundamental analysis but the analysis of how various trading floors are thinking and behaving. Technical indicators help us analyzing the market-mood by analyzing how the market is moving. Technical indicators also become very important as the traders on the big trading floors also make their trading decisions based on the same indicators. But then when everyone is following more or less the same technical indicators for trading decisions then everyone should be making money? Well, the indicator would show a different picture if you are using a 30-minute chart or a daily chart. The skills lie in comparing different charts of different periods and then making your analysis.
Technical indicators in Technical Analysis help us in analyzing the following:
1) Trend of the market: Whether there is an uptrend or downtrend or whether the market is moving sideways or without a trend.
2) If market has a trend then whether the trend is strong and hence offer us the opportunity to enter the market in the direction of its movement? What it means is if there is a uptrend which is strong then we can still buy but if there is an uptrend but it’s getting weaker then the market direction may reverse.
3) If the market is running sideways or in range then at what point we should buy and at what point we should sell or short-sell.
Technical analysis is broken into two main categories:
a)Chart patterns/trend lines (visual)
An over view of some important Technical Indicators:
SAR (Stop and Reversal):
•To determine whether a trend is ending and/or a new trend may start.
•To measure market’s volatility.
•To Give buying /selling signals during non-trending /sideways market.
•To Have an idea when the market may enter into a trend while running sideways.
•To identify a new trend
•To identify where a trend might be ending and/or a new trend may start (indicating over bought/oversold levels).
•To identify whether a trend might be ending and/or a new trend may start (over bought /over sold levels).
•RSI also can be used to confirm trend formations.
•To know resistance and support in sideways market.
•To identify trend reversal
•To know the strength of the trend
•To know the probable support and resistance levels.
There are a very large number of technical indicators available but it is always better to keep it simple and user a combination of some few indicators depending on the applicability as mentioned above. Using a wide variety of technical indicators only creates confusion and results in less chances of success.
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Article Added on Friday, July 8, 2011
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