8/13/24, 6:48 PM Stock Trading Indicators

Stock Trading Indicators

tradingsim.com/resources/stock-trading-indicators

Stock trading indicators are used by many stock traders, from beginner to advanced.
Yet, many traders do not understand the concept of a stock trading indicator and how
it affects their trading results.
Let's start with the basic definition of a stock trading indicator.

A stock trading indicator is any kind of analysis that helps you make better decisions
about your trades. To be more specific, an indicator is any quantitative measure at a
point in time that provides insight into the current state of the economy, an industry, a
company, a stock or a commodity.

When it comes to trading the stock market, the online world is full of advice — charts,
indicators, and strategies. Everyone thinks they can predict prices. While some
strategies are valid, others are complete bunk.

This list sifts through the fluff and gives you real indicators and strategies you can
use to make smart decisions on your next trade.

Volume Weighted Average Price (VWAP)

According to Investopedia, to find VWAP values you must add up "the dollars traded
for every transaction (price multiplied by the number of shares traded) and then
divide by the total shares traded for the day."

It's important to remember that VWAP is a measure of the average price that
investors are paying over the course of a trading session, not a measure of value,
per se.

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What is VWAP?
The Volume Weighted Average Price (VWAP) is an intraday calculation used to
compare where a stock is currently trading relative to its volume-weighted average
for the same day.

It is a technical indicator that can be used as a trading strategy for active traders.
However, it is also used by larger funds to evaluate the price performance of their
investments.

It is important to note that this indicator will be calculated on a daily basis. Each new
trading session resets the formula. There are other “multi-day” vwap indicators,
however. We discuss anchored vwap in another article.

VWAP Strategy
When choosing a trading strategy, it is important to consider many different factors
when deciding how to trade a stock. VWAP (volume weighted average price)
strategies are some of the most popular strategies used by traders today.

To understand VWAP it is best to have a good understanding of its components:

Volume - this represents the number of shares that have been traded in the stock
over any given time period. This can be measured by the total volume for the day or
for any given time span that you wish to measure.

Weighted Average Price - this represents all of the transactions during a period and
calculates the average price at which those transactions took place. It does not take
into account any open or pending orders.

Price - this is simply the price of the stock based on the last trade that occurred in
the market. Price is usually what you will see on a quote screen, but since it only
takes into account the last trade, it could potentially be very misleading as to where
the price is currently trading in relation to other trades that may have taken place
previously in that same time span.

VWAP Trading

For traders, VWAP can be used as an important guidepost in gauging whether the
price of a security is trading above or below fair value based on current volume
levels.

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For example, if you are watching a stock in which you have an interest, and it is
currently trading below its VWAP, you may consider buying that stock as it has been
trading at lower prices throughout the day so far.

As a result, you may be able to take advantage of more favorable pricing than what
you would get if you bought at the current market price. If this is your strategy, you
believe the uptrend will continue eventually.

On the contrary, if you are a momentum trader, VWAP may tell you who has the
upper hand: bulls or bears. To that end, you might consider going short when prices
are below vwap, or long when they are above.

VWAP Pullback Trade

We discuss many vwap trading strategies like the one above in our Ultimate Guide to
VWAP.

VWAP Boulevard

VWAP Boulevard is an indicator that uses the actual volume traded for a certain
period of time (VWAP) to display where institutional buyers or sellers' original
average price is located.

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Essentially, you identify the intraday vwap level for the prior highest volume days (or
significant intraday candles) that the stock ran. Draw your line there, then wait for the
current premarket or intraday action to reach and react to that level.

When the price is below the VWAP line, it suggests that the market is in a bearish
trend.
If the price is above the VWAP line, it suggests that the market is in a bullish trend.

The VWAP Boulevard indicator was designed to help traders stay on the right side of
the market.

Bollinger Bands Trading Indicator

John Bollinger created a technical indicator in the 1980s after his own name:
"Bollinger Bands". Bollinger Bands resulted from the observation that volatility was
dynamic, not static as was widely believed at the time.

The Bollinger Bands' price structure consists of three lines. Knowing these will help
you read Bollinger Bands:

1. A simple moving average (middle band) is used to identify the intermediate-

term trend, usually 20 periods.
2. An upper band (upper Bollinger band) is calculated by adding a standard
deviation (typically 2) multiplied by a smoothing constant (usually 20 periods) to
the moving average.
3. A lower band (lower Bollinger band) is calculated by subtracting a standard
deviation times a smoothing constant from the moving average.

What Are Bollinger Bands in Trading

Having evolved from the concept of trading bands, Bollinger Bands use a %b and
bandwidth to compare the current price of a stock to the previous price height or
depth.

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Bollinger Bands comprise a middle band with two outer bands. The middle band is
always a simple moving average that is usually set at 20 periods and is used
because the standard deviation formula also requires a simple moving average
(SMA).

The defined period for the standard deviation is exactly the same as the simple
moving average.

As you can see from the example above, the outer bands are usually set 2 standard
deviations above and below the middle band.
When the markets are volatile, the bands widen (move further away from the
average), and during less volatile periods, the bands' contract (move closer to the
average).

The basic interpretation of Bollinger Bands is that prices tend to stay within the
upper- and lower-band. The area between the two bands is known as the trading
range. As prices break above or below the trading range, this can be used to identify
potential buying or selling opportunities.

Bollinger Bands Strategy

A Bollinger Bands strategy is commonly used to identify potential trading

opportunities using a technique called percent-b, which uses the relationship
between price and the upper and lower bands to identify crowding conditions that
might foreshadow a significant move in either direction.

Bollinger Bands can also be used for reversals, squeezes, and snapbacks to the
middle of the bands. Here are just a handful of Bollinger bands strategies you can
employ in your trading:

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Double Bottoms

Reversals

Riding the Bands

Bollinger Band Squeeze

Snapback to the Middle of the Bands

Trading inside the Bands

We cover these Bollinger bands strategies more in-depth in our tutorial found here.

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) indicator was developed in
the late 1970s by Gerald Appel. Traders use the MACD indicator to identify changes
in momentum and the direction of a trend.

MACD is another very popular technical indicator in stock trading, so it is important to

have an understanding of how it works and what it shows.

What is Moving Average Convergence Divergence

Moving Average Convergence Divergence (MACD) is a trend indicator. It shows the
relationship between two moving averages and the price of a stock. You could also
consider it a momentum indicator.

By default, the MACD is calculated by subtracting the 26-period Exponential Moving

Average (EMA) from the 12-period EMA (though these settings can be customized).
A nine-day EMA of the MACD is what we call the "signal line". This is plotted on top
of the MACD and usually serves as a trigger for buy or sell signals.

The MACD indicator can be used to identify and confirm trends, time turning points,
and gauge momentum. It often foretells a change in the strength, direction, and
momentum of a stock.

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MACD Indicator

The MACD indicator is generally used in conjunction with other indicators or chart
patterns to provide trade entries and exits. It is based on three time-series moving
averages.

a fast-moving average (EMA)

slow-moving average (EMA)

the difference between them, which is displayed as a line and histogram

The fast-moving average is calculated with a shorter timeframe than the slow-moving
average; this difference allows for changes in price to be displayed quickly.

How to Read MACD Indicator

The moving average convergence divergence indicator attempts to identify trends

and it works by taking the longer-term trend and comparing it to a shorter-term trend.

The basic idea is that when the long-term trend is upward but the short-term trend is
downward, a trader might want to look for long positions because the long-term trend
will probably reassert itself.

The same logic applies when you have an upward short-term trend and a downward
long-term trend. The MACD indicator is more complicated than this, however. A
MACD graph shows you three numbers:

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1. It plots a line that shows you how far apart your short-term EMA and your long-
term EMA are — so if there's no difference between them, the line will be at
zero.

2. Another line shows how far apart your short-term EMA and your long-term EMA
are from their EMAs.

3. Finally, it plots a histogram showing how far apart those two lines are from each
other.

If you want to learn 5 really cool MACD strategies, head over to our tutorial and
video on MACD!

Fibonacci Trading Indicator

Fibonacci trading is one of the more popular stock trading indicators. Oftentimes,
you’ll see Futures, Forex, and stock markets react to Fibonacci numbers and levels
really well.

The widespread availability of the Fibonacci number sequence can be applied to just
about any market in order to determine how far the price might travel in a given
timeframe.

However, while the fact that this method works is not really in dispute, there are a
variety of different ways that Fibonacci numbers can be applied to the price action on
any given chart. And as with any other trading approach, some of these methods will
work better than others.

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What is Fibonacci Trading?

Fibonacci trading involves using numbers found in the Fibonacci sequence to identify
potential levels of support and resistance in financial markets. These levels are often
areas where traders can place their trades as well as exit trades.

Fibonacci Trading Strategy

The Fibonacci trading strategy is a method of predicting future price movements

based on the mathematical relationships discovered by mathematician Leonardo
Fibonacci in the 13th century.

Traders use these ratios to create a Fibonacci trading strategy based upon
retracements and extensions in an effort to enter and exit positions at key turning
points in the market. When combined with other technical indicators, such as moving
averages or oscillators, Fibonacci trading can become even more effective.

Traders using this method will look for patterns between high and low prices on a
chart that follow the same pattern as the Fibonacci number sequence. Traders may
use Fibonacci ratios as a tool to help determine optimal entry points into markets.

Fibonacci Sequence for Stocks

The Fibonacci sequence for stocks is a series of numbers where a number is found
by adding up the two numbers before it. Starting with 0 and 1, the sequence goes 0,
1, 1, 2, 3, 5, 8, 13, 21, 34, and so forth.
The formula looks like this:

xn = xn-1 + xn-2

These proportions are often found throughout nature and are known as the Golden
Ratio or Golden Mean. It has been used to describe natural phenomena such as
nautilus shells and spiral galaxies.

A Fibonacci retracement uses key Fibonacci levels as support and resistance before
it continues in the original direction of a trend. Fibonacci retracement levels are
plotted with these same key numbers identified by Leonardo Fibonacci in the 13th
century.

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These levels are derived from a mathematical formula and are found by taking points
in price that will divide the vertical distance between significant troughs and crests in
proportion to the key Fibonacci ratios of 23.6%, 38.2%, 50% and 61.8% (the most
important retracement levels are marked by the red lines on our chart).

For more great Fibonacci strategies, check out our post here.

Pivot Points
Pivot points are used by traders as a predictive indicator and denote levels of
technical significance. When used in conjunction with other technical indicators such
as support and resistance or Fibonacci, pivot points can be an effective trading tool.

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What Are Pivot Points in Trading?

At a very basic level, Pivot points are support and resistance levels. They are
calculated by using the open, high, low, and close of previous trading days, weeks, or
months.

Pivot points consist of a central pivot and three supporting pivot levels below it and
three resistance pivot levels above it. These levels can be used as entry or exit
points for trades based on whether the market is trending up or down.

There are several different types of pivot point calculations including standard,
Fibonacci, Woodie's, Camarilla and Demark. Each type differs slightly in their
calculation but the results remain very similar. To get started with trading pivot points,
you need to calculate them. However, most charting tools do this for us in real-time
now.

One unique aspect about Pivot points is that they are a "leading" indicator as
opposed to a lagging indicator. This just means that traders can use the indicator to
gauge potential turning points in the market ahead of time.

Pivot Points Trading Indicator

Pivot points are technical analysis tools that traders use to identify potential support
and resistance levels. It is a trading indicator that can be used on all time frames, but
they are particularly useful for shorter time frames where price action is more erratic
and less predictable.

Pivot points are determined using the high, low, and close prices of a defined period,
i.e day, week or month. In simple words, the pivot point is the average of the high,
low, and close. However, we also calculate a series of support and resistance levels
which are equally spaced above and below the pivot point.

These support and resistance levels help to determine how far the price could
potentially move either upward or downward. This makes pivot points a very useful
trading indicator.

The most common pivot point levels are taken from a daily chart. On a daily chart,
the current day's pivot point is determined by the price action of the previous trading
day. Based on the current day's pivot point levels, you will need to use a daily chart
to get an accurate level for that day.

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The pivot point trading indicator is usually the starting point from which all other
technical indicators, such as Fibonacci retracements and Bollinger Bands, are
calculated.

How To Use Pivot Points in Trading

Traders use pivot points in trading as a predictive indicator to denote levels of

technical significance. Just by looking at a chart, you might be able to determine
where a stock finds support or resistance based upon where the price is rejected or
supported. However, the great thing about pivot points is that it calculates many of
these areas automatically for you.

To that end, you can base some of your trading decisions off of these lines. Also,
when used in conjunction with other technical indicators, such as support and
resistance or Fibonacci, pivot points can be an even more effective trading tool.

As a rule of thumb, if the price is above the pivot, the asset is in an uptrend (or
bullish). If it is below, it is in a downtrend (or bearish). However, this is subjective. You
can use pivot points as targets or areas to risk off of.

If you’d like to study pivot points more in-depth, we’ve created a tutorial here with a
few strategies:

1. Pivot point breakout

2. Pivot point bounce

Stock Chart Trading Patterns

Stock patterns are visual representations of stock prices. They are used by traders
as a predictive technical analysis tool. In other words, each pattern represents

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familiar market conditions and can be used to predict how a stock will move.

Stock Patterns
When you're trading stocks, it's important to know how to read stock patterns. The
patterns we’ll describe below are some of the most common seen by traders when
evaluating a stock chart.

Patterns can form with one candle or a series of candles and can be seen on any
time frame from an intraday chart up to weekly and monthly charts. The following are
some examples of stock patterns that traders use:

Ascending triangle

Symmetrical triangle

Descending triangle

Cup and handle

Double bottom

Double top

Head and shoulders top/head and shoulders bottom

Trading Patterns

Patterns are recognized through implicit learning. Over time, you’ll pick up on these
patterns just as all the traders who’ve gone before you.

Trading patterns come in many different shapes and forms, but they’re all simply
historical analogs of stock price movements. It’s your job to attempt to forecast its
future movement. Chart patterns can include things like flag patterns, trendlines, and
triangles.

That being said, patterns aren't perfect, and nothing about trading is guaranteed.
However, there's a lot of money to be made when you have some idea about which
way a stock is going to move before it actually moves in that direction.

Flag Patterns

Flags are usually thought of as bullish continuation patterns. Flags form when a stock
moves strongly upward and then consolidates in a tight trading range.

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The flag pattern is created by two parallel trend lines that slope against the previous
trend. The two lines should act as support and resistance while the stock
consolidates.

Generally speaking, there should be at least five candlesticks between the trend line
breakouts. Flag patterns usually occur opposite the trend lines, in a sense: a break
out of a flag pattern signals the end of a corrective move and the resumption of the
trend.
For more on flags and pennants, check out our three favorite flag trading strategies

Falling Wedge Pattern

The Falling Wedge Pattern is a bullish reversal chart pattern that can be seen on any
chart time frame. The pattern consists of three price points, with the first price point
being the highest and the third price point being the lowest of the three price points.

As you can see, wedges can both rise and fall. However, the falling wedge pattern is
typically considered bullish in that we would expect the price to break to the upside of
the pattern.

To get up to speed on how to trade rising wedges or falling wedges, we’ve put
together our best tips and tricks for you to study.

How To Read Stock Patterns

Stock patterns can be short-term or long-term, and when applied correctly, they can
help you anticipate future price movements.

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Stock price movement is not always random, which means it can be predictable in
many cases. The beauty of this fact is that by studying historical trends and patterns,
technical analysts can predict what will happen next with a certain degree of
accuracy. However, there are still some risks involved because the financial market is
unpredictable.

In algorithmic trading, pattern recognition may be approached in one of two ways: via
classification or via clustering.

1. When using classification, the goal is to construct a model that assigns a label
to an input vector according to some algorithm.

2. When approaching pattern rec through clustering, the goal is to group similar
objects into clusters based on some similarity measure. Clustering allows for
the identification of outliers and clearly delineates where clusters begin and
end.

For the discretionary trader, you can read stock patterns simply through implicit
learning. The more you study charts, the more you’ll begin to see the subtle nuances
needed for each pattern to work. In this case, it is much more of a “feel” than
systematic.

Stock Pattern Cheat Sheet

As you embark on your trading journey, we recommend keeping things simple to

start with. There’s no better way to learn than to use a stock pattern cheat sheet.

Keep this cheat sheet handy so you pick up on key stock patterns as they play out on
your charts!

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Moving Averages
Moving averages are considered primary technical analysis tools. They're used to
smooth out short-term data to better identify longer-term trends or cycles. While
moving averages can be calculated for any period, the most popular are the 20-day,
50-day, 100-day, and 200-day moving averages.

What Are Moving Averages

A moving average calculates the average price of a security over a specified number
of periods. So if you wanted to calculate the 200-day moving average then you would
add up the prices of the last 200 days and divide this sum by 200.

Because moving averages are lagging indicators, they will always be behind the
price action. This is why you'll sometimes see traders refer to them as trend-following
indicators. The longer the period for the moving average, the greater the lag between
it and the spot price will be (check out this video for how to use simple moving
averages).

Trading with the Simple Moving Average | 27

For example, if we were looking at the closing price for the last 50 days, we would
add up the last 50 closing prices and then divide by 50 to get the average closing
price for those 50 days (this is called a "simple" moving average). Thankfully, most
chart indicators do this for us, and simply plot the value as a line.

There are four popular types of moving averages:

Simple (also referred to as Arithmetic)

Exponential

Weighted

Linear Regression

Simple moving averages give equal weighting to each price in the period whereas
exponential moving averages reduce this weighting over time. The type of moving
average you use is entirely up to you. Models that incorporate long-term moving

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averages into their forecasts are usually more successful than models that
incorporate only short-term moving averages.

Again, this will all depend upon your strategy and how frequently you trade.

50-Day Moving Average

The 50-period moving average is perhaps the most popular trading indicator. When
the price crosses above a moving average, it can be used to indicate that you should
enter a long (buy) position. Likewise, when the price crosses below a moving
average, it can be used to indicate that you should enter a short (sell) position.

The 50-day moving average is often used by longer-term traders to see when a stock
is trending. It displays the average closing price over the last 50 days or 50 periods.
The 200-day moving average is the average closing price over the last 200 days.
When you take longer and shorter-term moving averages like the 50-day and the
200-day and cross them on a chart, it often represents a long-term momentum shift.
Trend traders will often use these to enter and exit positions. We discuss the Golden
Cross more in-depth here.

Best Moving Averages for Day Trading

Moving averages are often cited as the Holy Grail of technical analysis. They can be
used to identify trends, spot reversals, and find support and resistance levels. But did
you know that they can also be used to identify high probability day trades? If you're
a day trader, moving averages can be your best friend or your worst enemy.

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While moving averages are great at identifying the trend, they can also cause you to
get shaken out of a position right before the next move.

A common question that comes up is, "What is the best moving average?" The
answer depends on your goals as an investor or trader. The answer also depends on
your time frame.
For example, A 20-period SMA will be much more useful on a shorter time frame
trade idea because a shorter moving average responds more quickly to changes in
price action. In contrast, a 50- or 200-period moving average may better suit the
longer-term trader.

How to Use Moving Averages

The moving average is used to help smooth out some of the noise in price changes
and give a clearer picture of what's going on in a stock's price history.

Moving averages are often used in conjunction with other technical indicators such
as MACD or RSI to help confirm trends or trend reversals. The concept is simple:
take a regular price chart and smooth it out by creating a series of averages. Then,
you plot that data on top of the price information.

The most common applications of moving averages identify key support and
resistance levels as well as trends. We discuss our 20 moving average pullback
strategy here. It’s definitely worth a read.

Support and Resistance Levels

Moving averages can also be used to identify support and resistance levels. These
two levels are used by traders to determine whether an asset's price will continue in
the direction of the trend or reverse.

This happens when an asset's price approaches a moving average; it tends to

bounce off it. In this way, moving averages act like dynamic support and resistance
levels that can be used by traders to enter or exit positions.

Trends in Price Movement

Traders may use moving averages to help determine where future support and
resistance levels might be. But, they also use them to identify trends and trend
reversals (i.e., when a new trend is forming).

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Traders also use moving averages in 'crossover' strategies, where they will buy if a
shorter-term moving average crosses above a longer-term one and sell if it crosses
below.

Key Takeaways for Stock Trading Indicators

We created this stock trading indicator post to help you make more informed trading
decisions. In general, trading indicators show you how the market is currently
performing, whether it's up or down, and if people are buying or selling. This
information can help you predict where the market is heading next, so you can make
smarter trades.

As with any strategy or indicator that is new to you, we recommend testing them out
in the simulator first. This way, you’ll learn how to set your charts properly, and know
which trading indicators work best for your strategies.

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