The six technical indicators for timing entry and exit in a short-term trading program

Definition

Technical analysis includes the study of:

Technical

analysis – the study of a stock’s price and trends; volume; and momentum.

- price; price trends; and direction of movement.

- volume; and how volume interacts with a price trend.

- momentum, or the speed of change in a stock’s price.

The six indicators

An investor may use any number of technical indicators, but six are essential for anyone trading short-term. These are: 1. trading range borders 2. momentum oscillators 3. volume 4. double tops and bottoms 5. gapping price movement 6. head and shoulders

1. trading range borders

The trading range is …

Definition

Resistance is the highest price where trading has been occurring, representing the highest price that sellers are willing to buy.

… the area between resistance and support.

Support is the lowest price where trading has been occurring, representing the lowest price at which buyers are willing to sell.

The range determines how volatile a stock is, and also whether or not trading will begin moving above or below the previous level.

Trading range

The trading range may take several shapes: - level, with resistance and support unchanging over time.

- rising, with both resistance and support increasing and remaining at the same breadth, or narrowing or widening.

- falling, with both resistance and support decreasing and remaining at the same breadth, narrowing or widening.

2. momentum oscillators

Momentum oscillators

A momentum oscillator measures the speed of movement in the price.

The oscillator may serve as a leading indicator or as a lagging indicator, compared to price.

One popular oscillator is Relative Strength Index (RSI)

Momentum oscillators

Relative Strength Index (RSI) is a calculated index from zero to 100.

When the index moves above 70, it reveals that the stock may be overbought and is likely to reverse and turn downward.

When the index is below 30, it reveals that the stock may be oversold and is likely to reverse and turn upward.

3. volume

Volume

The volume of trading – the number of shares bought and sold per day – can be very revealing.

Many volume indicators are used in technical analysis. These include on-balance volume, among others.

Traders also look for volume spikes as a signal of possible trend reversal.

4. double tops and bottoms

Double tops and bottoms

Definition

Double tops – A price formation with two upward spikes in price that test resistance, fail, and then retreat. Double tops often precede price movement to the downside.

The formation of distinctive tests of resistance (tops) or support (bottoms).

These double signals preceded price movement in the opposite direction and are considered strong technical reversal signals.

Double bottoms – A price formation with two downward spikes that test support, fail, and then retreat. Double bottoms often precede price movement to the upside.

The failed attempt to breakout above resistance or below support is a sign of lost momentum.

5. gapping price movement

Gaps

A gap is an space between closing prices of one day and opening prices of another.

Gaps are important signals of growing volatility and trend acceleration.

6. head and shoulders

Head and shoulders This price formation tests resistance and is followed by a reversal and price decline. It consists of three spikes, two shoulders and a higher head in between.

The same pattern can be seen in the inverse, with prices then moving upward and away from support.

Definition

Head and shoulders – a price pattern with three parts, two shoulders on left and right and a middle, higher price representing the head. The formation precedes an opposite trend moving downward.

The “inverse” head and shoulders has the same attributes, but appears at the bottom of the trend and precedes a price movement upward.

Conclusion

Technical indicators are not assurances that promise specific outcomes. They predict the likely next move.

Dozens of possible indicators may be used to time entry and exit.

Combined with fundamental tests, the technical indicators based on price, volume and momentum add valuable analytical aspects to the selection and timing of trades.