So, what should every trader worth his/her grain of salt have in their trading toolkit?
Technical traders and chartists have a wide variety of indicators, patterns, and oscillators in their trading toolkit to generate signals
Some traders focus on price history, others tend to look at trading volume, and momentum indicators. To get a valuable signal it is often best to use price history, trading volume, and momentum indicators in tandem or combination with one another.
“Technical traders and chartists have a wide variety of indicators, patterns, and oscillators in their trading toolkit to generate signals”
So here are the top tools in the trading toolkit, broadly speaking there are two basic types of technical indicators, which are overlays and oscillators
Overlays use the same scale as prices and are plotted over the top of the prices on a stock chart. For example, include moving averages and Bollinger Bands® or Fibonacci lines.
Oscillators are plotted above or below a price chart. Examples of oscillators include the stochastic oscillator, MACD, or RSI, which are the ones most commonly used by technical traders.
“there are two basic types of technical indicators, which are overlays and oscillators”
The on-balance volume indicator (OBV), is worth having in your trading toolkit
OBV measures the positive and negative flow of volume in a stock over time. The indicator is a running total of up volume minus down volume. Up volume is how much volume there is on a day when the price rallied. Down volume is the volume on a day when the price falls. OBV acts like a trend confirmation tool. If price and OBV are rising, that helps indicate a continuation of the trend.
“MACD helps traders see the trend direction, as well as the momentum of that trend” – Win Investing
Accumulation/Distribution Line (A/D line) is one of the most commonly used indicators in the trading toolkit to determine capital flows in and out of the stock
If the indicator line is trending up, it shows buying interest, since the stock is closing above the halfway point of the range. This helps confirm an uptrend.
Traders using the A/D line also watch for divergence. If the A/D starts falling while the price is rising, this signals that the trend is in trouble and could reverse.
The average directional index (ADX) is another trend indicator in the trading toolkit, which measures the strength and direction of the trend
When the ADX is above 40, the trend is considered to have a lot of directional strength, either up or down, depending on the direction in which the price is moving.
The Aroon oscillator is a technical indicator in the trading toolkit used to measure whether a security is in a trend
The indicator can also be used to identify when a new trend is set to begin. The Aroon indicator comprises two lines: an Aroon-up line and an Aroon-down line.
The moving average convergence divergence (MACD) is also another favored indicator in the trading toolkit
MACD helps traders see the trend direction, as well as the momentum of that trend. It also provides several trade signals. When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period.
The relative strength index (RSI) is a popular tool in the trading toolkit which helps to gauge momentum and trend strength
The most basic use of an RSI is as an overbought and oversold indicator. When RSI moves above 70, the asset is considered overbought. When the RSI is below 30, the asset is oversold and could rally.
But as any tradesman will tell you the most valuable tool in your toolkit is your brain.