Advance/Decline Technical Analysis
Indicators in Technical Analysis
A stock market indicator can be anything that will indicate (describe) the past, present or possible future health of a public company or sentiment of the price trend of any tradable commodity. In technical analysis, an indicator is a series of data plotted on a charts or presented in a spreadsheet that are derived by applying a specific algorithms to the price, volume, advance/decline and other data (open interest, bid and ask price, open/high/low/ prices, etc) of a tradable commodity.
Historically, the majority of technical indicators are based on different formulas applied to the past and present price quotes and, in many cases, to the closing price quotes. MACD, RSI, Stochastics, and Pivot Points are examples of price-based technical indicators where certain formulas are applied to the open, high, low and close quotes. Today, with the use of the computer and internet technology, volume and advance decline-based technical studies have become available for retail (not institutional only) traders and are very popular as well. Examples of volume-based technical indicators include PVO (Percentage Volume Oscillator), Accumulation and Distribution, and OBV (on Balance Volume), etc. Examples of Advance Decline studies include Advance/Decline Oscillator, McClellan Oscillator, TRIN, and Breadth Trust, etc.
Different technical indicators offer different perspectives from which to analyze. While applying technical studies to a particular stock will provide an analysis of the particular security, applying the same technical studies to an index may deliver different results and may provide an outlook on the same stock (if it is listed in this index), as well as an outlook on an entire market sector covered by this index. Such indexes as S&P 500, NASDAQ 100 and DJI have became the most consistent in technical analysis results. While applying the indicators to these indexes could be used to trade QQQ, SPY and DIA, the same analysis could be used to analyze the sentiment of the entire stock market.
When it comes to technical indicators, there are three basic indicators on which the majority of the others are based: moving average, difference and ratio. For example, MACD is the difference of two price moving averages and VO (Volume Oscillator) is the ratio of two volume moving averages.
There are two major groups of indicators in technical analysis: lagging and leading indicators. Leading technical indicators predict possible changes in trend and can be used to decide when an analyzed stock (security) is inclined to change its price trend. Lagging technical indicators (also known as trend-following indicators) can be used to confirm changes in a price trend.
As mentioned above, different technical indicators offer different perspectives from which to analyze. It is important to have access to several different types of technical indicators in order to receive a complete picture of a traded security. On one hand, it is recommended that you have at least one leading and one lagging indicator in your arsenal. On the other hand, it is recommended that you analyze at least one price-based and at least one volume-based technical indicator.
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