Technical indicator

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A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced.

While one data point does not offer much information, a series of data points over a period of time can create valid reference points to analyze a given security, enabling a comparison between present and past levels. Technical indicators are usually shown as a graph above or below a security's price chart. The indicator can then be compared with the price chart. [1]

Technical indicators can be used:

  • To act as an alert to study price action more closely. For example, waning momentum may signal a coming break of support. Or, a large positive divergence building may alert a trader to watch for a resistance breakout.
  • To confirm other technical analysis tools.
  • To predict the direction of future prices.

Types of technical indicators include: moving averages, which are derived from simple formulas and are relatively easy to understand; and Stochastics, which are more complex and require study to understand.