5 technical indicators you should know as an investor

Technical analysis can be defined as an art and science of forecasting future prices based on an examination of the past price movements. Technical, analysis is not astrology for predicting prices. Mass investor psychology is analysed using historical market data. The data includes price, time, and volume.

Technical analysis has universal applicability. It can be applied to any financial instrument -stocks, futures and commodities, fixed-income securities, forex, etc. A price chart offers most valuable information that facilitates reading historical account of a security's price movement over a period of time. Charts are much easier to read than a table of numbers. On most stock charts, volume bars are displayed at the bottom. With this historical picture, it is easy to identify the market reactions before and after important events, past and present volatility, historical volume or trading levels and relative strength of the stock versus the index.

Five indicators that every investor should know are:-

1) Relative Strength Index ( RSI)

The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes. Stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.

The indicator has an upper line, typically at 70, a lower line at 30, and a dashed mid-line at 50. When price moves up very rapidly, at some point it is considered overbought (When the RSI crosses 70). Likewise, when price falls very rapidly, at some point it is considered oversold (When the RSI crosses 30) the level of the RSI is a measure of the stock's recent trading strength. The slope of the RSI is directly proportional to the velocity of a change in the trend. The distance travelled by the RSI is proportional to the magnitude of the move.

2) Moving averages

Moving averages is one of the oldest and most useful technical indicators in technical analysis. Moving shows a trend in a "smoothed" manner and can give reliable signals when used in tandem with other oscillators like MACD and RSI.

Simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA) are the three types of moving averages.

For stocks, common time periods for moving averages are 10 days, 21 days, 50 days, 100 days and 200 days. The most commonly used moving average is the simple moving average (SMA). Single SMAs can be used to identify a trend but we find that dual or triple moving average is more powerful when combined together.

3) Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high or low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.

4) Bollinger Band

Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators. Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle band is a measure of the intermediate-term trend, usually a simple moving average that serves as the base for the upper band and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average. The default parameters, 20 periods and two standard deviations, may be adjusted to suit your purpose.

5) Parabolic Stop and Reverse or Parabolic SAR

A technical analysis strategy that uses a trailing stop and reverse method called "SAR," or stop-and-reversal, to determine good exit and entry points. This method was developed by J. Wells Wilder. Basically, if the stock is trading below the parabolic SAR (PSAR) one should sell. If the stock price is above the SAR then one should buy (or stay long).

(The author is CEO and founder of CapitalVia Global Research)