A technical indicator is a mathematical calculation that can be applied to a stock’s past patterns, like price, volume, or, even to another technical indicator.
Technical Indicator are most extensively used by active traders in the market, as they are primarily designed for analyzing short-term price movements. To a long-term investor, most technical indicators are of little value.
The result is a value that is used to:
ALERT: the trader about a trend
PREDICT: the direction of future prices
CONFIRM: technical analysis suggested by other indicator(s)
Categories of indicators
A. LEADING - Give trade signals when the trend is about to start.
They try to predict price, by using a shorter period in their calculation, there by leading the price movement. The most popular leading indicators are Stochastic, MACD, and RSI.
B. LAGGING - Are those that follow the price action.
They give a signal after the trend or reversal has started. Use them to determine a trend. The most common lagging indicator is the Moving Average.
Measure the strength of a trend or confirm a trading direction based on some form of averaging or smoothing a raw volume. The strongest trends often occur while volume increases; in fact, it is the increase in trading volume that can lead to large movements in price.
Chaikin Oscillator (Leading): Monitors the flow of money in and out of the market - comparing money flow to price action helps to identify tops and bottoms in short and intermediate cycles.
On-Balance Volume (OBV): On Balance Volume attemps to measure the level of accumulation or distribution by comparing volume to price movements.
Volume rate of change (Lagging): Highlights increases in volume, which normally occurr at most significant market tops, bottoms and breakouts.