Technical indicators are signals based on patterns or calculations from chart values. These include the asset price and trading volume. Data for securities are collected in real-time. Traders watch these like a hawk to wait for opportunities to appear. When using an automated trading system, technical indicators are heavily relied upon to check whether the conditions are favorable for buying or selling. Some of the most popular indicators include the Moving Average Convergence Divergence, Bollinger Bands, Relative Strength Index, and Money Flow Index. Here’s why you should start studying technical indicators:
Best for Predicting Short-term Price Movements
The stock market is a great place for long-term investors. If you are investing your money for your retirement funds, then it is best to look for assets that you can buy and hold for years. Value investors don’t really pay much attention to the current prices because they are more interested in the fundamentals of a business and its potential for growth. On the other hand, FX traders are usually more interested in the short-term price movements. There is no expectation of a continuously strengthening currency because that can be economically detrimental to a country. Instead, traders revel in volatility and use indicators to make their next move.
Useful for Setting Entry and Exit Points
When utilizing automated trading managers, it is important to set up your preferred entry and exit points. The software will only move when you tell it to so you have to be specific. Tell it what to look for in terms of the technical indicator values before it triggers a buy or a sell. If it spots an opportunity according to your definition, then it will act right away to deliver the results you want. Even more important is the fact that it will withdraw from an asset when that takes a beating to an uncomfortable degree. You are in-charge of defining your own risk tolerance.
Avoid Analysis Paralysis by Focusing on a Few
Novices often fall into the trap of using too many indicators when determining their next move. They think that this will help them cover all angles and protect them from making a mistake. However, using an excessive amount may only lead to analysis paralysis. They are unable to move forward because their indicators provide conflicting predictions on price movement. One way to break this is to test different rules on historical data and see which one provides the best results.
By learning which technical indicators to trust and which to ignore, a trader can make decisive moves that maximize opportunities.
