Technical indicators help in quantitative analysis of underlying assets to enable market trend predication. Technical indicators are based on mathematical and heuristic calculations.
Essentially technical Indicators can be categorized into 5 types
- Trend Indicators
- Momentum Indicators
- Volatility Indicators
- Volume Indicators
Trend Indicators are those that help in measuring the direction of a market trend. A trend could be market moving upwards, downwards or sideways.
Example: Simple Moving Average (SMA)
Momentum indicators help in measuring the speed and/or strength of the trend.
Example: Relative Strength Index (RSI)
Reversal indicators help predict a possible reversal in trend. Trend reversal such as a price drop after upward runup or a potential price upward movement after a downward trend of price.
Example: Moving Average Convergence/Divergence (MACD)
Volatility indicators help in measuring the uncertainty in the market. Standard deviation is the key indicator of volatility.
Example: Bollinger Bands
Volume indicators are those that measure the volume of the trades that are executed for the underlying asset. Higher volumes signify higher interest of traders in the particular stock and these stocks have potential to provide better profits (or losses).
Example: Money Flow Index (MFI)