Technical indicators are at present enjoying a great degree of interest and acceptance from common market participants that I’m not surprised to receive an earnest request to write more about them in plain language.
Overlays essentially function as trend-following or trend-confirming indicators. They are also known as “lagging indicators” because their trading signals come “after” the event has occurred. Commonly used trend indicators include the Moving average, Moving Average Convergence Divergence or MACD, Bolinger Bands, On-Balance Volume and Accumulation/Distribution line , and Fibonacci.
Conversely are the oscillators or so-called “leading indicators.” Unlike the lagging indicators, they give a signal “before” a change in trend occurs. As such, they are also momentum indicators that “will tell you how strong the trend is and can also tell you if a reversal is going to occur. They can be useful for picking out price tops and bottoms.”
The MACD, as mentioned earlier, is both an oscillator, momentum and a trend-following indicator. It is regarded as “the best” momentum indicator. MACD represents the relationship between two moving averages of a stock’s price. It moves back and forth between moving averages and indicates momentum as in “how strong the trend is and can also tell you if a reversal is going to occur. They can be useful for picking out price tops and bottoms.
On-Balance Volume and the Accumulation/Distribution Line are also known as Volume indicators. They essentially use volume flow to predict changes in stock prices. For instance, “when volume increases sharply without a significant change in the stock’s price, the price will eventually jump upward or fall downward.” Ideally, a rising price should be accompanied by a rising volume and a falling price should be accompanied by a falling volume.
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