Top Technical Indicators for Rookie Traders

Most amateurs comply with the herd when constructing their very first trading screens, grabbing a stack of canned indicators and also packing as numerous as feasible under the cost bars of their favorite protections.

We’ll start with two signs that are ingrained within the very same panel as the daily, weekly, or intraday price bars.

Moving ordinary convergence-divergence (MACD) sign, set at 12,26,9, gives beginner investors an effective tool to examine quick rate adjustment.

  • Trend indicators (lagging) analyze whether a market is moving up, down, or sideways over time.
  • Mean reversion indicators (lagging) measure how far a price swing will stretch before a counter impulse triggers a retracement.
  • Relative strength indicators (leading) measure oscillations in buying and selling pressure.
  • Momentum indicators (leading) evaluate the speed of price change over time.
  • Volume indicators (leading or lagging) tally up trades and quantify whether bulls or bear are in control.

Key Takeaways

  • A leading indicator is understood to indicate where price is going, while lagging indicators report background conditions when price is already in motion.
  • Setting technical indicators to the most applicable numerical inputs for a specific trading style requires a specific skill set and experience.

Most beginners follow the herd when constructing their very first trading screens, getting hold of a pile of canned indications and also packing as several as feasible under the rate bars of their favorite safeties.

Now that you comprehend the 5 methods that indications dissect market activity, allow’s determine the best ones in each category for beginner investors.

Trend: 50 and 200-day EMA

Top Technical Indicators for Rookie Traders

We’ll begin with two signs that are ingrained within the exact same panel as the daily, regular, or intraday cost bars.

Market movement advances via buy-and-sell cycles that can be recognized through Stochastics (14,7,3) as well as other loved one stamina signs.

Mean Reversion: Bollinger Bands (20,2)

Moving ordinary convergence-divergence (MACD) indication, established at 12,26,9, gives amateur traders an effective device to analyze fast price adjustment.

Relative Strength: Stochastics (14,7,3)

Top Technical Indicators for Rookie Traders

Market movement evolves through buy-and-sell cycles that can be identified through Stochastics (14,7,3) and other relative strength indicators. These cycles often reach a peak at overbought or oversold levels and then shift in the opposite direction, with the two indicator lines crossing over. Cycle alternations don’t automatically translate into higher or lower security prices as you might expect. Rather, bullish or bearish turns signify periods in which buyers or sellers are in control of the ticker tape. It still takes volume, momentum, and other market forces to generate price change.

SPDR S&P Trust (SPY) oscillates through a series of buy-and-sell cycles over a 5-month period. Look for signals where (a) a crossover has occurred at or near an overbought or oversold level and (b) indicator lines then thrust toward the center of the panel. This two-tiered confirmation is necessary because Stochastics can oscillate near extreme levels for long periods in strongly trending markets. And, while 14,7,3 is a perfect setting for novice traders, consider switching to faster 5,3,3 inputs once you gain market experience.

 Momentum: MACD (12.26.9)

Top Technical Indicators for Rookie Traders

Moving average convergence-divergence (MACD) indicator, set at 12,26,9, gives novice traders a powerful tool to examine rapid price change. This classic momentum tool measures how fast a particular market is moving, while it attempts to pinpoint natural turning points. Buy or sell signals go off when the histogram reaches a peak and thrusts in the opposite direction through the zero line. The height or depth of the histogram, as well as the speed of change, all interact to generate a variety of useful market data.

SPY shows four notable MACD signals over a 5-month period. The first signal flags waning momentum, while the second captures a directional thrust that unfolds right after the signal goes off. The third signal looks like a false reading but accurately predicts the end of the February–March buying impulse. The fourth triggers a whipsaw that’s evident when the histogram fails to penetrate the zero line. 

Volume: On-Balance Volume (OBV)

Top Technical Indicators for Rookie Traders

Keep volume histograms under your price bars to examine current levels of interest in a particular security or market. The slope of participation over time reveals new trends, often before price patterns complete breakouts or breakdowns. You can also place a 50-day average of volume across the indicator to see how the current session compares with historic activity.

Now add on balance volume (OBV), an accumulation-distribution indicator, to complete your snapshot of transaction flow. The indicator adds up buying and selling activity, establishing whether bulls or bears are winning the battle for higher or lower prices. You can draw trendlines on OBV, as well as track the sequence of highs and lows. It works extremely well as a convergence-divergence tool, as Bank of America (BAC) proves between January and April when prices hit a higher high, while OBV hit a lower high, signaling a bearish divergence preceding a steep decline.

The Bottom Line

Choosing the right technical indicators is daunting but can be managed if novice traders focus the effects into five categories of market research: trend, mean reversion, relative strength, momentum, and volume. Once they’ve added effective indicators for each category, they can begin the long but satisfying process of tweaking inputs to match their trading styles and risk tolerance.

Tip: For investors’ reference only, it does not constitute investment advice. Financial investment products have high risks and are not suitable for every investor. If necessary, please consult a professional consultant.