Most indicators are based on technical analysis and technical chart patterns This report will outline the basic type of indicators that work best for short term trading. Although, advanced technical indicators have become simple to use and are based on advanced mathematical and statistical formulas, visual analysis remains one of the most popular popular methods to analyze stocks, futures, currencies and commodity markets.
If markets are trending strongly, using a lagging indicator such as a moving average will produce the best results. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. Before I get into specifics, you need to understand that here are three basic type of indicators.
There are several different type of moving average indicators, the most basic kind is called the simple moving average.
Unlike the moving average which is a lagging indicator, that reacts to what has already happened in the markets. Basic patterns such as flags, head and shoulder patterns and other visual patterns based purely on price remain one of the best indicators for short term and swing trading strategies.
Conversely, if markets are flat and range bound, an oscillator such as the RSI or Stochastic would probably work best. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
One of the most popular momentum indicators is the RSI (Relative Strength Index) indicator. Many trading patterns that I use for my daily market analysis are based on simple visual analysis.
The RSI indicator measures strengthening and weakening of momentum and is most commonly used to indicate temporary overbought and oversold levels in stocks, futures and commodity markets. The typical length of a moving average is 20 days for short term trading, 50 days for intermediate term trend and 200 days for long term market analysis.
The RSI indicator works very well when markets are flat and range bound, and only recommended during these type of market conditions.
Many traders use indicators that are based on the moving average such as the Bollinger bands.
Another very popular use of momentum indicators is to determine divergence between the market and the indicator. If the market makes a lower low while the indicator makes a higher low, it indicates that the market is overbought and trend reversal may be near. Similarly, if the market makes a higher high while the RSI indicator makes a lower high, it indicates that momentum to the upside may be slowing down and the market may be overbought.
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