Trading tips: three must-have indicators in your arsenal
Overlays – Indicators that are plotted with the price scale and the top of the chart.
Oscillators-Indicators which usually have a range of high and low band values and are mostly plotted below the chart.
So, let’s start with the 3 essential indicators.
1. Moving averages
The most common and simple yet powerful, calculates the average change in data over a specified period. Moving averages are also called moving trend lines.
There are various combinations and strategies for trading MAs (moving averages), one of them being breakouts – where the trade is initiated when the price breaks through the MA.
Crossovers – A combination of two moving averages is plotted on the chart while one is of a shorter period, example: 50 and 200 DMA (daily moving average). A trader receives a buy signal when the 50 DMA crosses the 200 DMA and a sell signal when the 200 DMA closes below the 50 DMA.
When the 50 DMA closes above the 200 DMA it is called the Golden Cross in the same way when the 200 DMA closes below the 50 DMA it is called the Death Cross.
2. ATR – Average True Range.
Stop losses are an important aspect of trading, protecting your capital should be the top priority you want to be consistent in the markets. Often traders complain of being stopped out on the trade, which means their stop losses are still triggered.
While market movements are not under anyone’s control, erratic moves, sudden swings, and day-to-day volatility are contributing factors. A common mistake we make is to underestimate price movements. ATR helps to assess daily/weekly price fluctuations.
ATR = (Previous ATR * (n – 1) + TR) / n
ATR = average true range
n = number of periods or bars
TR = actual range
Increasing ATR means increasing volatility – so when ATR increases, make sure your stops are placed further away from the entry price – A simple tip is to hold at least half the value of the ATR as a stoploss.
3. ADX – Average Directional Index
Are you often stuck in stocks that don’t move? Chances are the stock is not in a trend or is trading sideways. The ADX helps measure the strength of the trend in just one
Developed by J. Welles Wilder, Jr. also known for creating one of the most popular RSI (Relative Strength Index) indicators
ADX is a non-directional indicator, which means it will not tell you which direction the security will move but will calculate the strength of the indicator.
Let’s get straight to understanding the indicator, the value represents whether the stock is trending or not.
ADX value trend
0-25 The trend is weak
Strong trend 25-50
50-75 Very strong
Avoid trading when the ADX value is below 25.
(The author is the founder, IamRakeshBansal.com)
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)