how technical indicators work
technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity such as price movement and volume unlike fundamental analysts who attempt to evaluate a security s intrinsic value based on financial or economic data technical analysts focus on patterns of price movements trading signals and various other analytical charting tools to evaluate a security s strength or weakness technical analysis can be used on any security with historical trading data this includes stocks futures commodities fixed income currencies and other securities in this tutorial we ll usually analyze stocks in our examples but keep in mind that these concepts can be applied to any type of security in fact technical analysis is far more prevalent in commodities and forex markets where traders focus on short term price movements technical indicators also known as technicals are focused on historical trading data such as price volume and open interest rather than the fundamentals of a business such as earnings revenue or profit margins technical indicators are commonly used by active traders since they re designed to analyze short term price movements but long term investors may also use technical indicators to identify entry and exit points types of indicatorsthere are two basic types of technical indicators traders often use many different technical indicators when analyzing a security with thousands of different options traders must choose the indicators that work best for them and familiarize themselves with how they work traders may also combine technical indicators with more subjective forms of technical analysis such as looking at chart patterns to come up with trade ideas technical indicators can also be incorporated into automated trading systems given their quantitative nature example of technical indicatorsthe following chart shows some of the most common technical indicators including moving averages the rsi and the macd in this example the 50 and 200 day moving averages are plotted over the top of the prices to show where the current price stands relative to its historical averages the 50 day moving averages is higher than the 200 day moving average in this case which suggests that the overall trend has been positive the rsi above the chart shows the strength of the current trend a neutral 49 07 in this case the macd below the chart shows how the two moving averages have converged or diverged slightly bearish in this case 