“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher

The quotation mentioned above refers to the fact that investing on any one of the global financial markets without researching both the underlying market conditions as well as the price movements of an individual asset can only lead to disastrous investment decisions. Furthermore, research involves far more than just listening to popular opinion; it is about utilising trading tools such as technical indicators, graphs, and charts to help you determine whether it worth investing in a particular asset at any given point in time.

Technical indicators and analysis 

A technical indicator is essentially a mathematical calculation based on an asset’s historical price data and volume being sold with the aim of forecasting financial market direction. In other words, it is a study of market-generated data as well as data generated from the actions of market investors. Furthermore, a technical indicator is a crucial part of the whole technical analysis process where the data is usually portrayed as a chart or graph predicting current and future market trends.

Before the art and science of technical analysis using technical indicators sounds too complicated, a financial analyst notes that at its root, technical analysis is nothing more than a method of deciding whether it is worth trading on an asset or not. Furthermore, he is of the opinion that “once you identify whether an asset is trade worthy or not, you are in the enviable position of being an industry leader when constructing a successful investment portfolio.”

Types of technical indicators

There are many technical analysis tools available for analysts to use, with brand new ones being covered on any serious financial blog in the world; however, you mainly need the following information: You need to know where the asset is currently trading and how the asset got to this trading level. Secondly, you need to learn how dominant the price trend is. And finally, you need to compare the asset to the market, its peers in the same niche, as well as to its history.

Consequently, to ensure that you determine the information mentioned above, you need access the following five technical indicator tools:

Relative performance indicators  

These indicators show the ratio of an asset’s performance to the relative market index or business category. In other words, when you choose an underlying asset to trade on, you need to look at how it is performing when compared to the financial market as a whole as well as when compared to its industry peers.

Trends and trend lines

In short, it is relatively straightforward to track market trends. Ergo, if you look at a graph or chart of an asset’s price, and you find that the price line indicating the highs and lows keeps on rising as well, then you have a rising trend. The rising trends are the ones that will always be preferred by investors.

Support and resistance levels

In technical analysis, support and resistance are a concept that the movement of the price of an asset will tend to stop and turn back at certain predefined price levels. Furthermore, multiple touches of price denote these levels without a breakthrough of the particular level. In other words, support and resistance levels merely tell us what price levels are likely to draw out the buyers and the sellers.

Moving averages

In essence, a moving average is a statistical calculation that looks at the average price of an asset over a set period, ranging from five days to six months or more. It’s important to note that a moving average is a lagging indicator; it follows an event. Ergo, the mathematical calculation uses historical data to track the trend of the asset.

Momentum and Volume

In summary, a momentum indicator measures the speed at which the asset’s price rises and falls. Furthermore, it is a useful indicator of strength or weakness in the stock’s price.  On the other hand, a volume indicator merely shows the numbers of shares that have been traded in a set timeframe.

Final words

Thorough market research is critical as part of your decision-making process when deciding on which underlying asset to trade on. Furthermore, once you have decided on an asset, you will then need to decide on your trading strategy. The good news is that technical indicators, when used correctly, go a long way towards proving the necessary information; thus, allowing you to invest from a strong trading position.

Article by Taylor Wilman