What are Technical Indicators?

Technical Indicators are generally used to identify the future price movements of a stock. Usually, traders
use such technical indicators in conjunction with price to make a decision for buying or selling a stock.

In technical analysis, the price of a stock is supreme, and everything revolves around price, as technical
indicators are generally mathematical calculations based on the stock price itself. By interpreting these
technical indicators, you can generate buy signals when an indicator suggests a potential upward
movement and sell signals when it indicates a possible downward trend, aiding in making informed
trading decisions.

Categories of Technical Indicators

There are two broad categories of technical indicators. They are namely:

1. Leading Technical Indicators– These technical indicators generate signals ahead of price action
movements.

2. Lagging Technical Indicators– These technical indicators provide a signal after a price action
move has occurred which the technical indicator confirmed.

Both categories of technical indicators are equally important and have their own pros and cons of using
it while studying technical analysis.

Types of Technical Indicators

In general, there are five different types of technical indicators, as shown below:
Each technical indicator has unique characteristics that generate buy-sell signals and which can help you
make trading decisions. However, this particular blog will only discuss trend indicators, as Ed Seykota
rightly indicates the importance of trend analysis while trading in the stock market.

Overview of Trend Indicators

Trend indicators are tools used to identify and confirm the direction of a stock’s price movement. These
technical indicators can help you to determine the prevailing trend (upward, downward, or sideways) to
make informed decisions. Analyzing the price trends can easily provide you with a general idea of the
ongoing trend of a stock. However, in this blog, there are three technical indicators that will be explained
in detail so that you can become an expert in trend analysis using the technical indicators.
Top 3 Technical Indicators

Let’s discuss the top three trend based technical indicators which can help you determine the correct
entry and exit points while trading stocks.

1. Moving Averages

This trend indicator smooths out price data to create a single flowing line, making it easier to identify the
direction of the trend. When price trades above the moving average it is considered to be bullish and
vice versa. Although it is a lagging indicator, it helps to get a confirmation of the trend. It basically
averages out the stock price for a particular time period to filter out the noise from the short-term price
fluctuations.

There are two types of moving averages which are, Simple Moving Average (SMA) and Exponential
Moving Average (EMA).

SMA is where you simply add up the price points and divide by the specified number of periods, whereas
EMA gives more weightage to recent price points while calculating the average. Therefore EMAs for
trend analysis are comparatively better as recent price action drives the future price movements of a
stock.

Some popular moving average time frames are 20, 50, 100 and 200.

Moving Average Strategy

A crossover between short and long-term EMAs generates some of the best buy and sell signals on the
daily price chart. These crossover signals can provide swing traders with the right opportunity at the
right time.

So, how exactly does the EMA crossover work?

When a short term EMA crosses above the long term EMA form below is considered as a bullish signal.
Also known as the Golden Crossover.

When a short term EMA crosses the long term EMA from above is considered as a bearish signal. Also
known as Dead Crossover.

Here is an example of Britannia Industries Ltd.

Yes, the moving average crossover strategy looks promising but how to identify such crossovers. That’s
where StockEdge comes in to help you become a smart trader. The technical scans in StockEdge, can
definitely help you identify EMA crossovers in stocks.
There are a plethora of EMA scans available in the StockEdge app. Use it to identify crossovers and make
informed trading decisions in the market.

2. SuperTrend Indicator

This is an extremely popular technical indicator because of its simplicity. It determines whether you
should be in a long (buy) or short (sell) position. However, this technical indicator is derived from a
volatility based technical indicator which is average true range (ATR) values. Thus, a supertrend indicator
considered as a dynamic technical indicator because of its use of ATR in its calculation makes it adaptive
to market volatility, providing timely signals in different market conditions.

How do you interpret the Supertrend Indicator?

When the price is above the Supertrend line, the stock is considered to be in an uptrend, and the
indicator line turns green. This suggests that traders might consider long positions. On the other hand,
when the price is below the supertrend line, the stock is in a downtrend, and the indicator line turns red.
This indicates that traders might consider short positions.

In the above example, look at the daily chart of National Aluminium Ltd. The stock is upturned as per the
price chart. However, with the use of supertrend indicators, you can easily identify entry and exit points.
For instance, when price is trading above supertrend indicator it indicates a buy signal where the
supertrend line acted as support at some points and when supertrend indicator changes to red it means
price went below supertrend line which suggest an exit of long position in the stock.

However, please note there are few limitations to this technical indicator which is when stock is in
whipsaw or sideways movements supertrend indicator may generate multiple false signals. Hence in a
consolidating phase of a stock, you can avoid using the supertrend indicator as this technical indicator is
considered for a trend analysis and its best works in trending markets.
Now, to identify such stocks which are giving buy or sell signals based on the supertrend indicator, you
can use StockEdge Scans. Simply go to technical scans to find supertrend scans.
All four supertrend scans can provide you with trading opportunities in stocks. It easily filters out from
more than 6000 stocks listed in the market to give accurate trading signals, so that you can make
informed decisions at the right time.

3. Parabolic SAR

Parabolic SAR is a versatile and straightforward technical indicator that can not only help you identify
trends but also potential reversal points, set trailing stop losses, and make informed trading decisions. It
determines the direction of a stock’s momentum to identify potential points of trend reversals. It is
primarily used to set trailing stop losses and to decide entry and exit points for trades.

This technical indicator is plotted on a price chart as a series of dots, either above or below the price.
When the price is in an uptrend, the dots are plotted below the price, and when the price is in a
downtrend, the dots are plotted above the price.

Parabolic SAR Strategy

A Bullish Signal (Buy) is generated when the SAR dots move below the price, which indicates a potential
uptrend. A Bearish Signal (Sell) is generated when the SAR dots move above the price; it indicates a
potential downtrend.

Take a look at the example of Syngene International Ltd. This technical indicator has generated buy and
sell signals on the daily price chart. As you can see, when the dots move below the price a buy signal is
generated and a long entry can be created. The exit can be made when SAR dots move above the price
or when the trend progresses, the dots move closer to the price, signaling potential reversal points when
the price crosses the SAR dots.
Being a trend based technical indicator its limitation remains the same where in case of consolidating
phases, the parabolic SAR tends to generate false signals and you can avoid using this or any other trend
based technical indicator during such phases.

Again, to identify such potential trend reversal in stocks, you can use Parabolic SAR scans in StockEdge. It
offers both bullish and beamish price reversals in daily and weekly charts.
If you are looking for trend reversal trades, Parabolic SAR is one of the best technical indicators for
identifying potential trading opportunities.

Wondering how to scan or filter out stocks for trading? StockEdge has 300+ scans based on several
technical and fundamental parameters. You can learn to optimize your stocks selections using StockEdge
scans. Read the blog: Optimize Your Stock Selection: Leverage StockEdge Scans

Hopefully, these three technical indicators may turn out to be helpful in your trading journey. Moreover,
you can also watch this YouTube video: