Financial trading is like traditional buying and selling, but instead of goods, traders are trading on financial assets such as stocks, cryptos, Forex, commodities, and more.
Traders often use technical indicators to analyze price behavior and try to follow the market pulse. Indicators are crucial for day trading, and we will explain what indicators are and how to employ them correctly to increase the win rate in trading.
What Are Financial Indicators?
Financial or technical indicators are just mathematical formulas applied to price charts to show some insights depending on the formula. The most popular indicators include moving averages, which show average prices for a specific period.
Indicators are typically built into trading platforms. Trading platforms like MetaTrader 5 allow traders to access financial markets and get the latest real-time price data.
Top indicators for the MT5 platform enable traders to analyze markets, gauge the behavior of prices, and react to capitalize on opportunities. There are two types of indicators, technical and fundamental.
Technical indicators are mathematical formulas that follow price and analysis while the fundamental indicators are major economic news such as inflation data, employment data, and so on.
Technical Indicator Types In Financial Trading
There are several types of indicators according to what they are doing and how their formula works.
Some indicators show trend direction, while others monitor price volume or momentum to inform traders about price whereabouts for a specific moment and period. Let’s consider the most popular technical indicator types and list them.
Trend Indicators
Trend indicators help identify the market direction, which is critical for trend traders. The trend is characterized when the price is dominantly moving in one direction.
The most common explanation of a trend is higher highs (price swings) for an uptrend and lower lows (lower price swings) for a downtrend.
Popular trend indicators include Moving Averages (SMA, EMA), MACD, and so on. Moving averages show the average price for a user-specified period and can be used as a dynamic support and resistance levels and trend lines. MACD indicates momentum and can indicate trend reversals.
Momentum Indicators
Momentum indicators analyze and assess the momentum of price movements in financial markets.
It gets the price data and employs mathematical formulas to help traders identify trends, potential reversals, and overbought or oversold conditions. The most popular momentum indicators include RSI, stochastic oscillator, and more.
RSI or Relative Strength Index evaluates price using a formula and compares recent gains or losses. RSI showing above 70 indicates overbought and below 30 suggests oversold conditions.
Stochastic compares a specific closing price to a range of prices over the user-defined period, and also shows overbought and oversold levels. Above 80 is overbought and below 30 might indicate oversold.
Volatility Indicators
Volatility is an important concept in financial trading and refers to how fast the price changes at a given moment. Highly volatile markets are dangerous for traders as it is difficult to react in time and can cause serious losses.
Popular volatility indicators are Bollinger bands, Average True Range (ATR), and so on. Bollinger bands show overbought and oversold levels, which is powerful in determining the volatility of price movements.
It employs standard deviation around a moving average to show price volatility. Wider bands are characterized by increased volatility, and narrower bands indicate lower volatility.
ATR is a powerful indicator that measures the average range between high and low prices over a user-specified period. It is useful to assess volatility levels.
Volume Indicators
Volume indicators analyze the number of shares, contracts, or units traded in a user-specified time period. These indicators are especially powerful as they show the strength and weakness of price movements and can indicate the level of trader participation in the market.
Several volume indicators are very popular, including VWAP (Volume-weighted average price) and OBV (On-balance volume). VWAP is especially popular among experienced stock traders and institutional traders, as it averages the price of an asset based on volume.
It is very often used as the main benchmark for exit and entry points. OBV on the other hand, combines volume and price and can indicate buying and selling pressure on the asset.
How To Use Trading Indicators
Indicators can be a powerful tool in the hands of traders who know how to use them correctly. The main idea is to use numerous indicators but not too many, this is to avoid overloading the chart and also ensuring not to be dependent on any single indicator.
Novice traders are especially susceptible to these mistakes when they try to find a holy grail system and make a near 100% win rate.
Traders should strategically combine indicators like trend plus momentum. In this case, when one indicator indicates a trend, momentum indicators and volatility indicators will show how strong the current trend is.
There are many other ways to combine indicators, and traders should always try not to use more than 3-4 indicators. Also, avoid using several indicators of the same type.