12 Best Technical Indicators for Trading Stocks & Analyzing Profitability

Experts in every discipline have a toolbox of some sort. For many professions like carpenters, mechanics, and roofers, the term “toolbox” is literal. For the likes of investors, lawyers, and marketers, “toolbox” is more a figurative term, but it’s just as important.

The most successful investors have an extensive toolbox made up of both the best technical indicators and the best fundamental data that can be used to determine future price movements in the market.

Technical indicators are just as important to predicting price movements as a hammer is to nailing a shingle to a roof. Without them, the investor would essentially be blind, making moves on gut instincts and gambling with their money.

In fact, some technical indicators are so accurate that they form the basis for popular in-depth research and analysis tools like Trade Ideas and Stock Rover.

When searching for the indicators that have the potential to make you a better investor, you’re met with a list of tools that’s so big it would take years to make a single investment if you were to try and use them all.

But what indicators are best to use? Which have the best chances of actually increasing your profits?

What Are the Best Technical Indicators?

Technical indicators in general are tools that assist investors in using history to determine the most probable path of a financial asset’s price in the future. These indicators form the foundation for technical analysis as a whole.

This form of analysis is based on the theory that financial markets move in repeatable, quantifiable patterns. Therefore, by identifying and tracking patterns in a stock chart, technical analysis provides both entrance and exit signals that, more often than not, lead to profitable moves in the market.

Although technical indicators should be included in every investor’s toolbox, the importance given to these indicators varies by investing style. In most cases, investors fall in one of two categories:

  1. The Buy-and-Hold Investor. Buy-and-hold investors have long-term goals. They may be investing for retirement, childrens’ college funds, or the down payment for a new home. These investors look for growth by buying stock in companies that they believe will grow over time regardless of short-term ebbs and flows in valuations.
  2. The Trader. Traders live on the wild side of the investing spectrum. They are interested in generating significant growth through short-term moves made in the stock market. The trader doesn’t necessarily care what the intrinsic value of a company is or what its long-term growth prospects are. Traders focus on patterns in price movements and primarily care about where on the chart a stock is trading and where it is most likely to head moving forward.

While all investors should pay attention to some technical indicators, they are not as important for the buy-and-hold investor seeking to gain from long-term stock performance rather than short-term price fluctuations.

Of course, you don’t want to purchase a stock that’s overbought, because your investment will likely take an initial hit prior to the long-term growth you predicted. Nonetheless, technical data should not be the driving factor behind a buy-and-hold investor’s decision to buy or not to buy a stock.

If you’re looking to take a short-term trading strategy, correctly predicting price movements is going to be difficult, but not impossible. By placing a high level of importance on technical indicators, you can greatly improve your chances of trading success. The best technical indicators do just that.

Some of the most accurate of these indicators include:

1. Support

Support is the lowest point the value of a security is likely to fall to before making a reversal and working its way back toward the top. This is a psychological barrier based on the premise that the investing community simply will not let the price of the security fall below this point.

In order to determine where support lies for a specific investment, all you need to do is take a look at the stock chart. The lowest point on the stock chart is considered support.

However, this can be confusing depending on how far back in time you look. After all, the lowest point on today’s stock chart is likely to be very different from the lowest point on a chart that tracks the stock’s movement over the past month.

So, which point of support do you use?

The vast majority of investors use moving averages (more on these below) to find support and resistance levels, which provide a much more accurate level of support. In terms of support as a single technical indicator, investors should consider time frames ranging from 30 to 90 days.

The closer a stock trades to support, the more oversold it is considered to be. As such, the closer a stock gets to this level, the stronger the chances that future short-term price movement will be in the positive direction.

2. Resistance

Resistance is the exact opposite of support. It’s the point at which a stock that’s moving on an upward trend is likely to hit a wall and start falling. The idea here is that stocks trading close to resistance are overbought. As a result, future short-term movement is likely to be negative.

To find resistance, simply find the highest point the stock has reached on the stock chart. A more accurate point of resistance can be found using moving averages, but paying attention to the highest point of resistance over the past 30 to 90 days will prove helpful for both the buy-and-hold investor and the trader.

3. Moving Average (MA)

Price data in the stock market is volatile, leaving jagged up and down points on stock charts. Moving averages — often abbreviated MA and also known as simple moving averages — are used to smooth these edges and provide an easier-to-read trendline based on the average price of the stock over a predetermined period of time.

Moving averages can span any amount of time that you’d like. However, the most common time frames are 30-day, 50-day, 90-day, and 120-day moving averages.

Due to technical innovation, determining a stock’s moving average is as simple as clicking a button on an interactive stock chart like the one provided by Yahoo! Finance. Nonetheless, the calculation that determines a moving average is simple.

For this example, to calculate the 30-day moving average of a stock, all you need to do is add the closing prices for the past 30 trading days together and divide the total by 30. Every day, the oldest number drops out of the average, making room for the newest number to be included, hence the name “moving” average.

There are several ways in which a moving average can help you make more successful investments. Some of the most important include:

  • Determining Support. When a stock is trading above its moving average, it is generally on an upward trend. As the stock reaches resistance and reverses, it will come closer to its moving average, with the major moving averages — 30-day, 50-day, 90-day, and 120-day moving averages — acting as key points of support. Should the value break below its moving average, the move is considered to be a bearish breakout and a signal that significant declines are likely ahead.
  • Determining Resistance. When a stock is trading below its moving average, it is generally experiencing a downtrend. As the stock reaches support and starts bouncing back, the major moving averages will act as a point of resistance. If the stock breaks above a major moving average, the action is considered a bullish breakout, and significant gains are likely ahead.
  • Moving Average Crossovers. Moving averages with different time frames can be used in conjunction with each other to provide accurate buy and sell signals as well. Crossovers are the points at which two moving averages of different time frames cross paths — in most cases, the 30-day and 90-day moving averages are used. When the short-term moving average crosses above the long-term moving average, the move is called a bullish crossover, signaling potentially significant gains ahead. Conversely, when the short-term moving average crosses below the long-term moving average, the move is a bearish crossover and a grim sign of painful declines to come.

4. Exponential Moving Average (EMA)

The exponential moving average — sometimes abbreviated EMA — works a lot like the simple moving average, but there’s one key difference.

In simple moving averages, the closing price of each day is given the same level of importance as each prior day’s. So, the oldest price in the average is just as important as the newest.

When determining exponential moving averages, a higher level of importance is given to the most recent price data with the lowest level of importance given to the oldest price data within the average. The idea is that the most recent data will give the trader a more accurate picture when determining where the price is likely headed in the near future.

The exponential moving average is used in the same way as the simple moving average, ultimately assisting traders and investors by providing relatively accurate buy and sell signals based on average price action.

5. Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence, also known as the MACD indicator, is an oscillator and momentum indicator that’s commonly used by traders for both buy signals and sell signals.

MACD is calculated by subtracting the value of the 26-period moving average from the 12-period moving average, creating the MACD line. Next, a nine-period moving average of the MACD is plotted on the chart for the signal line.

The two lines create what’s known in the trading industry as an oscillator, which is generally used to show if a stock is overbought or oversold. When these lines move away from each other, close to each other, or cross one another, they provide distinct signals.

As is the case with the simple moving average crossover or the exponential moving average crossover, when the MACD line crosses above the signal line, it’s a bullish crossover or a signal that the stock is likely to move up ahead. Conversely, when the MACD line moves under the signal line, the move is considered a bearish crossover, and prices are expected to fall.

The further away the MACD line gets from the signal line, the more momentum is involved in the price movement, giving traders even more information on the potential short-term price appreciation or depreciation and the extent to which the stock will rise or fall.

6. Relative Strength Index (RSI)

Relative strength index — often abbreviated RSI — is a momentum indicator commonly used by traders to determine the strength of price changes in the market. The indicator is an oscillator, meaning that it’s plotted on the stock chart as two lines that move toward or away from each other.

The current relative strength index of a stock, index, or other asset is displayed as a numeric value from one to 100, giving investors and traders information as to whether an asset is overbought or oversold.

Most importantly, the RSI tells you one of two important conditions of a stock:

  1. The Stock Is Overbought. An RSI above 70 suggests that the stock is overbought, or overvalued. In general, this means that the stock is primed for a reversal from recent gains and likely to head into a losing streak. The higher above 70 the RSI goes, the stronger the chances of a reversal. Moreover, high RSIs suggest that momentum of the pullback will be intense.
  2. The Stock Is Oversold. An RSI below 30 suggests that the stock is trading in oversold conditions, or is undervalued. This generally means that the stock has been falling and is likely to reverse directions, heading for positive movement. If an RSI falls far below 30, the move suggests that a positive reversal is all but imminent and the trend strength during the reversal will be high.

7. Bollinger Bands

Bollinger bands are a set of three trend lines plotted on a trading chart. This technical analysis tool was developed by John Bollinger to more accurately determine if a stock is trading in overbought or oversold conditions and provide buy and sell trading signals.

The three trend lines that make up Bollinger bands include:

  • Simple Moving Average. The center trend line in a set of Bollinger bands is a simple moving average. Most traders use the 20-day moving average as the center line in their Bollinger bands.
  • Upper Band. In general, the upper band is created by adding two standard deviations to the 20-day simple moving average and plotting the band on the chart accordingly. Standard deviations are statistical measurements found through complex mathematical calculations — explained in detail by Math Is Fun — and are designed to determine how spread out numbers in a sequence are from their combined average. The good news is that most interactive trading charts do all of that math for you.
  • Lower Band. The lower band in a set of Bollinger bands is generally created by subtracting two standard deviations from the 20-day simple moving average and plotting the result on the stock chart.

When plotting Bollinger Bands on a stock chart, traders have the ability to adjust the amount of time included in the simple moving average for the center line, as well as the number of standard deviations to add or subtract for the upper and lower bands, giving you the ability to customize the indicator to your needs.

Traders who use Bollinger bands believe that the closer the center line gets to the upper band, the more overbought the stock is. Conversely, if the center line nears the bottom band, the stock is considered to be trading in oversold conditions.

As a result, when the value of the stock nears the upper band, there’s strong potential for a reversal, leading to declines ahead, acting as a sell signal. When the value of the stock nears the lower band, a coming reversal is expected to lead to gains ahead, acting as a buy signal.

8. Stochastic Oscillator

The stochastic oscillator is yet another oscillator designed to outline overbought and oversold conditions. This momentum indicator compares the closing price of a security to a range of prices over a predetermined period of time.

Similar to the RSI, the stochastic oscillator is displayed as a number between 0 and 100. When the stochastic oscillator trades over 80, it’s a signal that the stock is overbought and overvalued, suggesting that high volatility and declines are likely ahead.

On the other hand, stochastic oscillator values under 20 suggest that a stock is oversold and undervalued, signaling a potentially profitable entrance opportunity.

Those looking to invest or make long-term trades may reduce the sensitivity of the stochastic oscillator in order to get a picture of momentum over longer periods of time.

If you would like to reduce the sensitivity of the oscillator to market volatility, simply take a moving average of the result or increase the number-of-trading-days-covered range compared to the closing price of the security.

Those looking to make short-term trades often increase the sensitivity of the oscillator to get a better view of short-term price movements. Sensitivity can be increased by reducing the range compared to the closing price of the security.

9. On-Balance Volume

On-balance volume is a momentum indicator that uses the volume of trades in a stock to determine whether strong price movement is likely ahead. The indicator was created by Joseph Granville in 1963 and is based on the idea that sharp increases in trade volume will ultimately result in sharp increases or decreases in price.

The goal in using this indicator is to find stocks that have seen sharp increases in volume while price movement has remained generally flat.

The longer volume rises and price movement doesn’t react, the more tightly what Granville refers to as the “spring” is wound. The idea is that at some point the spring is let loose and the stock pops in one direction or another.

On-balance volume tracks both the trading volume of a security and whether that volume is flowing in or out of the security.

If the on-balance volume shows that volume is high and flowing into the security, the general idea is that “smart money” — funds and institutional investors — are buying in and that retail investors will soon hop on the bandwagon, sending prices through the roof.

On the other side of the coin, when on-balance volume shows that volumes are high and flowing out of a security, it means that institutional investors are likely taking profits and retail investors will soon follow, resulting in a negative trend direction.

10. Ichimoku Cloud

The Ichimoku cloud is a compilation of trend lines used to measure a wide range of trading factors. In fact, the Ichimoku cloud indicator provides information with regard to support, resistance, momentum, and trend direction.

The Ichimoku cloud takes five different calculations into account, two of which create distinct trend lines where the middle of these lines is shaded in. This shaded area is considered “the cloud.”

You can find all the calculations involved in the Ichimoku cloud online, but once again, these calculations no longer need to be done manually thanks to technical indicator options provided by most quality interactive trading charts.

The Ichimoku cloud provides four valuable bits of information at a glance.

  1. Trend Direction. When the price of the stock is trading above the Ichimoku cloud, it means that the trend direction is upward. Conversely, when the value of a stock is trending down, the price will be trading below the cloud.
  2. Support. When the price of the stock is trading in the cloud, the bottom of the cloud forms an area of support. Generally, this is where the price of a stock will reverse directions and start moving upward. A break below support may suggest significant declines ahead.
  3. Resistance. When the price of a stock is trading in the cloud, the top of the cloud forms an area of resistance. If a breakout above the resistance line occurs, the stock is likely to see significant gains. Otherwise, stocks trading close to this line are likely to see declines ahead.
  4. Momentum. Momentum can be gauged by paying attention to how high above the cloud or low below the cloud the stock is trading. The further the stock veers from the cloud, the more momentum the stock is experiencing.

11. Fibonacci Retracement Levels

Fibonacci retracement levels are lines on a stock chart designed to provide predictions as to where future support and resistance levels lie. These lines are based on Fibonacci numbers and displayed as percentages, including 23.6%, 38.2%, 61.8%, and 78.6%.

These Fibonacci retracement levels are designed to help traders determine how much of prior movement the price of a stock has retraced.

Fibonacci sequences are used in mathematics and are common patterns in nature, such as the growth patterns of plants and in the spirals of mollusk shells. Many believe that Fibonacci levels in stocks form natural support and resistance lines when applied to finance.

The idea is that when a stock is experiencing an uptrend and breaks across one of these Fibonacci retracement levels, the level the price crosses becomes the new support, and the next level becomes resistance.

Conversely, when a falling stock falls through a Fibonacci retracement level, the level the stock fell past becomes resistance, with the next level below becoming support.

Keep in mind that this indicator literally attempts to predict the future by determining exact future points at which support and resistance should take place.

Although the indicator has far more wins than it does losses, predicting the future is no exact science, and this indicator should not be used as the sole tool in your investing or trading toolbox.

12. 52-Week High

As its name suggests, the 52-week high is the highest price at which a stock has traded during the course of the past year. This is a key psychological level that acts as a shockingly successful technical indicator.

In general, the 52-week high is a major point of resistance. As a result, when a stock is nearing this point, it’s a signal that a serious reversal may be ahead. On the other hand, reaching a 52-week high is a key accomplishment, and if there’s strong news driving the move and the company’s fundamentals are solid, the stock may eventually break through the resistance.

Historically, when a stock rises above its 52-week high, it experiences a period of gains that exceed those of the overall market given current market conditions. When this happens, day traders have a field day, snapping up shares as the fear of missing out (FOMO) takes hold.

As such, if a stock is nearing its 52-week high, it’s best to be a bit apprehensive when it comes to buying and doing detailed research. However, if the bulls prevail and the 52-week high is broken, it’s time to consider an investment to take advantage of the market-beating gains that are likely ahead.


Final Word

When investing and trading, it’s important to make sure that you have the leading technical indicators in your toolbox. Although these indicators are most important for day traders and others looking to make quick money from their investments, they are also useful tools for the long-term investor.

Nonetheless, it’s important to keep in mind that technical indicators are tools used to predict future price movements in the market. Considering that even the leading indicators can’t give you a 100% accurate depiction of the future, it’s best to combine technical tools with fundamental tools and proper research to increase your probability of profitability.

It’s also important to use multiple indicators to both determine and confirm price trends when charting. Again, no single indicator or group of indicators will always yield accurate results. However, by confirming your findings through multiple indicators, your probability of success will be much higher.

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