The 9 best technical indicators for stock market analysis is an article about the best tools for helping traders identify trends, overbought and oversold conditions, and to help point out entry and exit points. Traders and investors from all walks of life use these indicators widely to make informed decisions on when to buy or sell a stock.

On Balance Volume

On-balance volume indicator or OBV measures negative and positive volume flow into security over a given duration. The indicator subtracts the total down volume from the total up the volume. 

The up volume describes the amount of volume per day where the price surged. On the other hand, down volume defines the volume per day where the price dropped. 

On a daily basis, the On balance volume helps add or subtract volume from the indicator on the basis of whether the price rose higher or dropped lower.

Buyers will be willing to step in and push the price higher by buying whenever the OBV is increasing. However, a falling OBV denotes that sellers are gaining more strength against buyers and hence traders should anticipate a price decline. Therefore, the indicator serves as a trend confirmation tool. If the price as well as the OBV rally, this shows the indicator is confirming a trend continuation. 

It is common for a trader to use divergence alongside on-balance volume. This is especially popular on occasions where the price and indicator are moving in different directions. Where the price is surging but the OBV is dropping, the signal could be indicating weak buyers, hence the chances of a strong price reversal. 

Accumulation/Distribution Line

The A/D Line or accumulation/distribution line help determine the money flow into and out of a given asset class. 

Think of it as partly similar to the OBV indicator, however, instead of considering the opening price; the calculation only puts into account the closing price. An addition is the use of the trading range as the trading duration, and where the closing price should be a price near that range. 

As you can see, both calculations are different and each might work well in certain situations. Therefore, note that either of the two indicators will work better in particular cases. 

Where the indicator line is trending upwards, that becomes a signal for buyers starting to show interest because the price of the stock is closing above the mid-point range. Therefore validating an uptrend. 

In cases where the accumulation/distribution line is dropping, it shows that the price is closing below the mid-point of its daily range, therefore invalidating any chances of an uptrend and hence confirming a downtrend. 

In most cases, traders will use the A/D line alongside divergence. When the A/D begins dropping, the price starts rising. Therefore showing the trader that the trend could reverse at any given time. Conversely, where the trend is trending lower and the A/D line begins rising, this shows that higher prices are imminent. 

Average Directional Index

The ADX or average directional index measures a trend’s momentum and strength. This is why the average directional index belongs to the category of trend indicators. Nonetheless, remember a reading of 40 on the ADX denotes a strong directional trend which could be either upwards or downward. 

The ADX signals a weak trend momentum when it falls below 20. You can also call it non-trending.  

On a chart, the colour code of the ADX is usually black. There are then two more lines that can be used to show the ADX. These could be the DI+ and the DI-. A D+ line is usually colour-coded red, while the D- has green as its colour code. 

All three lines work in sync to help indicate a trend’s direction and the strength or momentum of the trend. 

The Aroon Indicator

The Aroon Indicator is a technical analysis tool for measuring the strength and direction of a trend. It consists of two lines: the Aroon Up line and the Aroon Down line. The Aroon Up line measures the strength of the uptrend, while the Aroon Down line measures the strength of the downtrend. A high reading on the Aroon Up line indicates a strong uptrend, while a high reading on the Aroon Down line indicates a strong downtrend. The lines oscillate between 0 and 100, with values closer to 100 indicating a stronger trend. The Aroon indicator helps traders to identify trend changes, potential trend reversals and time entry and exit points.

The Aroon indicator differs from the A/D line because the latter helps measure the flow of money into and out of an asset, whereas the Aroon indicator is used to measure the strength and direction of a trend in an asset’s price.

MACD

The Moving Average Convergence Divergence (MACD) indicator is a popular technical analysis tool for identifying changes in the strength, direction, momentum, and duration of a stock’s price trend. Analysts arrive at it by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. The result is the MACD line.

A 9-day EMA of the MACD called the “signal line,” is also plotted on the chart. The MACD line often oscillates above and below the signal line, and when it crosses above the signal line, it is a bullish signal, indicating that the stock is likely to rise in value. Conversely, when the MACD line crosses below the signal line, it is a bearish signal, indicating that the stock is likely to decrease in value.

The MACD also has a histogram, which is the difference between the MACD line and the signal line, and it is plotted above and below the zero line. When the histogram is above the zero line, it indicates bullish momentum, while when it is below the zero line, it indicates bearish momentum. The bigger the distance between the MACD and the signal line, the stronger the momentum.

In summary, the MACD is a momentum indicator that uses the relationship between two moving averages to identify changes in a stock’s price trend, it provides information about the direction, strength and momentum of a trend, and the histogram helps to confirm the direction of the trend. Traders use it as a tool to time entry and exit points.

The Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator that compares a stock’s closing price to its price range over a specified period of time. This indicator is meant to provide information about the location of the close relative to the high-low range over a given period. The indicator oscillates between 0 and 100, with readings above 80 indicating that a stock is overbought and readings below 20 indicating that a stock is oversold.

Traders take into account two lines when calculating the Stochastic Oscillator, the %K and the %D line. The %K line is a fast line and experts arrive at it by taking the current closing price and subtracting the low of the specified period, then dividing that value by the difference between the high and low of the specified period. The %D line is a slower line and it is calculated by taking a moving average of the %K line.

The two plotted lines, the %K line and the %D line are the standard way of indicating the stochastic oscillator. The %K line oscillates between 0 and 100, with values closer to 100 indicating that the stock is trading near its 52-week high, and values closer to 0 indicating that the stock is trading near its 52-week low. The %D line is then plotted as a signal line. When the %K line crosses above the %D line, it is a bullish signal, indicating that the stock is likely to rise in value. Conversely, when the %K line crosses below the %D line, it is a bearish signal, indicating that the stock is likely to decrease in value.

In summary, The Stochastic Oscillator is a momentum indicator that compares a stock’s closing price to its price range over a specified period of time, it is calculated using %K and %D lines, and it is plotted as two lines. The %K line oscillates between 0 and 100, and the %D line is a signal line. Traders use it as a tool to time entry and exit points.

Relative Strength Index

The Relative Strength Index (RSI) is a momentum indicator that compares the magnitude of a stock’s recent gains to the magnitude of its recent losses. It is calculated using the following steps:

1. First, the average gain is calculated by summing the gains over a specified number of periods, usually 14, and dividing by 14.
2. Next, the average loss is calculated by summing the losses over the same number of periods and dividing by 14.
3. The RSI is then calculated by dividing the average gain by the average loss, and then taking the value of 100 – (100 / (1 + RS)).
4. The RSI is plotted as a line oscillating between 0 and 100.

When the RSI is above 70, it is considered overbought, indicating that the stock may be due for a price correction. Conversely, when the RSI is below 30, it is considered oversold, indicating that the stock may be undervalued and due for a price increase.

Moving Averages

A moving average is a technical analysis tool that helps to smooth out price data and to identify trends over a period of time.

A moving average is usually the average closing price of a stock over a specified number of periods, such as 10, 20, 50, or 200 days. The result is a line that is plotted on a chart, and it is used to help identify trends and to smooth out volatility.

There are different types of moving averages, such as simple moving averages (SMA) and exponential moving averages (EMA).

The simple moving average is the sum of the closing prices of a stock over a specified number of periods and divided by the number of periods. The exponential moving average, on the other hand, gives more weight to recent prices and less weight to older prices.

Traders often use moving averages in combination with other indicators to identify trends, time entry and exit points, and confirm signals. For example, when the short-term moving average crosses above the long-term moving average, it is considered a bullish signal and indicates that the stock is likely to rise in value. Conversely, when the short-term moving average crosses below the long-term moving average, it is considered a bearish signal and indicates that the stock is likely to decrease in value.

Bollinger bands

Bollinger Bands are a technical analysis tool used to measure volatility in a stock’s price. They have two plotted standard deviations away from a moving average, typically the 20-day moving average, and they create a channel around the price action of a stock.

The upper Bollinger Band represents the upper limit of the stock’s volatility, while the lower Bollinger Band represents the lower limit. The width of the Bollinger Bands varies based on the volatility of the stock. When the stock is more volatile, the bands will be farther apart, and when the stock is less volatile, the bands will be closer together.

Traders use Bollinger Bands to determine overbought or oversold conditions. When the stock’s price reaches the upper Bollinger Band, it is considered overbought and may be due for a price correction. Conversely, when the stock’s price reaches the lower Bollinger Band, it is considered oversold and may be due for a price increase.

Another way traders use Bollinger Bands is by looking for price action that occurs outside the bands, which is considered a signal of a potential trend change. When the stock’s price breaks above the upper Bollinger Band, it is considered a bullish signal, while when the stock’s price breaks below the lower Bollinger Band, it is considered a bearish signal.