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Every Trader Needs to Know These 3 Technical Indicators

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Trading is considered one of the most difficult, complex, intricate and intimidating practices in the world. There’s a reason why most trading pros believe that over 90% of new traders fail.

That shouldn’t deter you from learning the business, however. But trading is going to present you with a wealth of information, and you need to discern what works from what doesn’t.

With that in mind, there are some technical indicators to keep an eye on that can make the trading process easier when you’re first starting out.

Volume

Volume is one of the most important technical indicators for new traders to get a grasp of. Some technical traders believe that volume precedes price, meaning that volume changes before a stock starts to trend higher or lower.

When a stock moves on relatively low volume, it suggests a divergence, which should correct itself and revert to the mean. However, when there is a large price move on high volume, it could be an indication of a trend reversal or the continuation of trend. That in mind, some traders will follow volume in an attempt to trade in the same direction as the market.

Check out this daily chart on Applied Optoelectronics (AAOI).

Source: TradingView 

On the annotated chart, you can see where the company reported earnings, and shares rose on heavy volume. Thereafter, you’ll notice AAOI continued higher after the volume spike. This case is similar when there’s a volume spike followed by a fall in the stock price, and it could be an indication that the stock could continue lower.

Simple Moving Average

Another technical indicator that’s widely used by traders is the simple moving average. The simple moving average smoothes out price changes in a stock, and filters out some noise. Simple moving averages are considered a lagging indicator because they are based on historical prices.

Still, they provide a look at the overall trend of the stock. To calculate the simple moving average, take the average of the prices over a specified period (think hours or days). Thereafter, every time another period passes, you shift the average price forward, giving you multiple values that you can plot over time.

Most free charting software or websites allow you to overlay the simple moving average onto a stock chart.

One strategy that technical traders particularly like is the moving-average crossover. Quite simply, it uses short-term and longer-term moving averages to identify potential changes in trends.

Here, for example, is a daily chart on Apple Hospitality REIT Inc (APLE):

Source: TradingView

This is an example of a bearish crossover, which occurs when the short-term moving average crosses below the longer-term moving average. Looking at the encircled area, that’s where the 20-day simple moving average crossed below the 50-day simple moving average. If you were able to get short APLE on this crossover, you could have profited.

By comparison, here’s a recent bullish crossover in Ambarella Inc. (AMBA):

Source: TradingView

In the circled area on this chart, the 20-day simple moving average crossed above the 50-day simple moving average. That being the case, getting long on AMBA, could have generated profits on this move, setting your target exit around $60, where the next level of resistance is.

Level II

Level II provides information of price action for stocks, providing a look into what is going on by, among many uses,  indicating the type of traders who are buying or selling, and whether the stock is likely to rise or fall in the short-term (within the day).

Level II is essentially the order book for stocks on major exchanges, reflecting the buy or sell orders entered through market makers and other market participants. This indicator shows the best bid and ask prices, ranked from highest to lowest for the bid side and lowest to highest on the ask side. This provides acuity into the depth of the market, as well as the supply and demand for the stock. That said, understanding how Level II quotes works can be beneficial to your trading. However, again, this takes time and you’ll need to practice following Level II quotes to develop an understanding of how stocks trade.

Final Thoughts

These technical indicators are just a few that traders know and use to improve their trading. They aren’t infallible or automatic, but they are useful tools for anyone looking to gain insight into stock movements.

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