Common Indicators and Strategies for Stock Market

Different people use different techniques to trade in the Indian Stock Market. While some follow the technical analysis, the others use techniques like pattern analysis, candle stick analysis and so on. The technical analysis is a wide field with a lot of time and efforts required to master it. The important indicators involved in technical analysis are simple moving averages, exponential moving averages, RSI, MACD and Bollinger bands.

 The moving averages are the average of latest n values of the price movement. Here n indicates the period of the moving average. The moving averages can be calculated for any period. In case of exponential moving averages the exponential weight-age are added along with the individual price values. Thus the response given by exponential moving average is faster than that of simple moving averages. The strategy used while using the simple moving averages (SMA) or exponential moving average (EMA) is that the two SMA or EMA of different periods are drawn. Then the movements of the two moving averages are watched for a cross over. The crossover of the moving averages indicates the potential chance of trend reversals and the buy and sell calls can be initiated at these levels. It is advised to the analyst that he should change the period of SMA or EMA to see which moving average is following the price signals closely and giving better results and less error signals.

There are other indicators like RSI which are widely used in the technical analysis. The RSI indicator comes under the category of oscillators. The RSI is used to indicate the overbought and oversold levels. The value of RSI falls between 0 and 100. A level of above 70 indicates the overbought level and a level of below 30 indicates an oversold levels. The overbought and oversold levels are important indicators of trend reversals. The RSI indicator is used in conjunction with other indicators to confirm the trend reversal opportunities.

Similar to RSI, the Bollinger bands are also used extensively in the technical analysis. The Bollinger bands are created with the moving average and the positive and negative deviation around it. It is a known fact that the prices continuously oscillates in the Bollinger band. The breakout from the Bollinger band can be taken as potential opportunities for reversals.  If the breakout is obtained from the upper band a sell signal is initiated. On the other hand if the breakout is obtained from the lower band, a buy signal is initiated.

The above discussed strategies and techniques involving various indicators are widely used by the technical analysts to generate accurate stock market tips.