Previously we have discussed the difference between technical and fundamental analysis. We have spoken in detail about both of them, but for those of you who missed that blog, fundamental analysis is basically taking a financial decision depending on news and political events, technical analysis on the other hand is predicting the price by reading the chart and using what is called indicators.
But what are these so-called indicators? Are they really that useful? If so, what are the most famous indicators amongst investors?
All these questions shall be answered in today’s blog.
What are indicators?
The “in a nutshell” answer is that indicators are math functions graphs drawn on a price chart to help traders and investors predict the direction of the price of a certain asset.
Or in other words, they are tools to aid the investor or trader do his technical analysis.
Are trading indicators worth learning?
Short answer is YES, indicators are there to aid you throughout your trading journey and help you trade profitably.
We should mention that using a single indicator is not that much of a help, you need to use a combination of 2 to 4 indicators (some investors say 3 to 6 but that is debatable) to get a clear idea of where the market is headed.
What indicators do traders use?
If you ask any trader he will say “Moving Average”, it is basically a percentage that shows the buy/sell ratio so if the MA is less than 50% means that the market is bearish, if it’s above 50% on the other hand it means that the market is bullish.
Another indicator that comes to mind is the RSI or Relative Strength Index; it’s a tool that helps to evaluate the dynamics of price changes in relation to its previous value.
It is believed that the RSI can determine the mood of the participants in currency trading, and determine the direction of the market in the overbought and oversold region, where the price should turn around and head in a new direction.
The Bollinger Bands indicator was invented by technical analyst John Bollinger, and information about the Bollinger Bands was first published in 1987 in Barry Kaufman’s book “The New Commodity Trading Systems and Methods”, surprisingly, although the world has known this indicator for more than 30 years. However, the Bollinger Bands still enjoy unprecedented popularity, according to official data, the Bollinger Bands indicator is included in the standard set of popularity on trading platforms.