Stock Technical Analysis – what are technical Indicators (Part 1)?
Technical Indicators are self-contained trading systems that have been developed by successful traders. Indicators are pre-programmed logic that traders can use to augment their technical analysis (candlesticks, volumes, S&R) when making trading decisions. Indicators aid in the buying, selling, confirmation, and prediction of trends. Leading and lagging indicators are the two sorts of indicators. A leading indicator is one that predicts the occurrence of a reversal or a new trend before it happens. While this seems intriguing, it’s important to keep in mind that not all leading signs are reliable. Leading indicators have a bad reputation for sending out erroneous indications.
RSI as a leading indicator:
As a result, when using leading indicators, the trader must be extremely vigilant. In fact, as traders gain expertise, their ability to use leading indicators improves. [br] Because they oscillate within a restricted range, the majority of leading indicators are called oscillators. An oscillator often oscillates between two extreme numbers, such as 0 and 100. The trading meaning differs depending on the oscillator’s reading (for example, 55, 70, etc.). [br] A trailing indicator, on the other hand, follows the price, signaling the occurrence of a reversal or a new trend after it has occurred. You might wonder what good it would be to receive a signal after an event has occurred.
It’s better late than never, right? Moving averages are one of the most widely used lagging indicators. [br] You might be wondering why, if the moving average is an indicator in and of itself, we discussed it before the indicators were properly discussed. The reason for this is that moving averages are a fundamental notion in and of themselves. It’s used in a variety of indicators, including the RSI, MACD, and Stochastic. As a result, we talked about moving average as a separate topic. [br] Before delving deeper into individual signs, I believe it is necessary to first grasp the concept of momentum. The rate at which the price moves is known as momentum.
if a stock price is Rs.100 today and increases to Rs.105 the next day, and then to Rs.115 the next day, we may say the momentum is high because the stock price has increased by 15% in just three days. However, if the same 15% shift occurred over a three-month period, we can conclude that momentum is modest. As a result, the stronger the momentum, the faster the price changes. You might be wondering why, if the moving average is an indicator in and of itself, we discussed it before the indicators were properly discussed. The reason for this is that moving averages are a fundamental notion in and of themselves. It’s used in a variety of indicators, including the RSI, MACD, and Stochastic.
The Relative Strength Index (RSI) is a measure of how strong J.Welles Wilder invented the Relative Strength Index (RSI), which is a popular indicator. The RSI is a leading momentum indicator that can be used to spot a trend reversal. The RSI indicator oscillates between 0 and 100, and market expectations are set based on the most recent indicator reading. The term Relative Strength Index is a misnomer because it does not measure the relative strength of two securities, but rather shows the security’s internal strength. The most widely used leading indicator, the RSI, provides the strongest signals during sideways and nascent market conditions.
For RSI in tradingview, 14 data points for the calculation is the default period setting in the charting software. This is also called the look-back period?. If you are analyzing hourly charts, the default period is 14 hours, and if you are analyzing daily charts, the default period is 14 days.
This leads us to another interesting way to interpret RSI.
There are the following two simple scenarios:
Scenario 1) A stock which is in a continuous uptrend (remember the uptrend can last from few days to few years) the RSI will remain stuck in the overbought region for a long time, and this is because the RSI is upper bound to 100. It cannot go beyond 100. Invariably the trader would be looking at shorting opportunities, but the stock, on the other hand, will be in a different orbit.
Scenario 2) A stock that is in a continuous downtrend, the RSI will be stuck in the oversold region since it is lower bound to 0. It cannot go beyond 0. In this case, the trader will be looking at buying opportunities, but the stock will be going down lower.
This leads us to interpret RSI in many different ways besides the classical interpretation that is If the RSI is fixed in an overbought region for a prolonged period, look for buying opportunities instead of shorting. The RSI stays in the overbought region for a prolonged period because of an excess positive momentum.
If the RSI is fixed in an oversold region for a prolonged period, look for selling opportunities rather than buying. RSI stays in the oversold region for a prolonged period because of an excess negative momentum
If the RSI value starts moving away from the oversold value after a prolonged period, look for buying opportunities. For example, the RSI moves above 30 after a long time may mean that the stock may have bottomed out so here a case of going long.