What is a Technical Indicator?
A technical indicator defines the evolution over time of a variable characterizing the state of a value or a market. It is important to note that this is the price that makes indicators and the reverse. Therefore, technical indicators have to be regarded as a decision aid and not as the main factor in decision making. A buy or sell signal on a single indicator is not sufficient to take a position.
However, it is possible to combine several technical indicators in decision-making to fulfill defaults of these indicators. Indeed, several indicators that give a buy or sell signal at the same time, it considerably strengthens the signal. In your combinations, it is advisable to combine indicators of different families (cf. classification below). In fact, each category of indicators has its advantages and defaults and according to market conditions at a t time t, they will work more or less well. For this reason, you must diversify your indicators.
Generally, the calculating period of the technical indicator is very important. A small number of periods will make your indicator highly reactive but it will give you many false signals. Conversely, if the calculating period of the the indicator is too big, you'll have very few false signals, but the reactivity (which determines the timing of your position) of the indicator will be bad.
These technical indicators are classified into different categories:
- Trend indicators: These indicators let you know the current trend on the pair. So you know the direction you need to trade if you take a position
- Volatility indicators: These indicators allow you a better placement of your stop loss and may also allow the detection of reversal points
- Momentum: These indicators allow you to appreciate the strength and speed of a movement. These indicators all have overbought and oversold zones, telling you if a reversal of the price is likely to happen or not
- Resistance and support (R & S) indicators: These indicators let you obtain zones of resistance and support, helping you to determine your target price and your stop loss
- Volume Indicators: These indicators allow you to anticipate reversals or continuity of movement from the study of trading volumes.
- Market indicators: These indicators are primarily used to identify divergences with the price.