Popular Technical Analysis Indicators

Published at 1715747724.38183


Technical indicators are mathematical calculations used in financial markets to analyze trading data on prices and volumes. The general purpose is to predict price trends, identify potential entry and exit points, and assess trading risks.

Based on their intended purpose, technical indicators are classified into 4 groups: Trend-Following Indicators, Volatility Indicators, Momentum/Oscillators and Volume Indicators.

Trend-following indicators assist investors in determining whether the price of a security is generally trending upwards, downwards, or sideways, as well as assessing the strength of that trend.

Several widely recognized trend-following indicators are:

  • Simple Moving Average (SMA)

  • Exponentially Smoothed Moving Average (EMA)

  • Linearly Weighted Moving Average (LWMA)

  • Wilder’s Moving Average

  • Average Directional Movement Index (ADX)

Volatility indicators are to assess price volatility. An increase in price volatility following a period of stability (low volatility) may signal a potential breakout from the previous price range.

Common volatility indicators include:

  • Bollinger Band

  • Keltner Band

  • STARC Band

  • Average True Range

  • Divergence Index

Momentum/Oscillators focus on measuring the speed at which prices are moving and whether that speed is increasing or decreasing. These indicators typically have a defined range of values (for example, from 0 to 100 or from -100 to +100). When the indicator reaches an excessively high level, it may indicate that the asset is overbought, suggesting that the price has risen too rapidly (experiencing significant acceleration) and may subsequently move sideways or reverse downward. Conversely, if the indicator reaches an extremely low level, it may indicate an oversold condition, suggesting that the price has declined too quickly and may then move sideways or reverse its downtrend, transitioning into an upward movement.

Some popular momentum/oscillators include:

  • Relative Strength Index

  • Momentum/Rate of Change

  • Moving Average Convergence/Divergence

  • Stochastic Oscillator

  • William's %R

  • Larry Williams’ Accumulation/Distribution Oscillator

  • Relative Vigor Index

  • True Strength Index

  • Vortex Indicator

And volume indicators, by analyzing volume alongside price action, traders can extract valuable information about the strength of a trend or identify potential reversal points.

Some commonly used volume indicators are:

  • On-Balance Volume

  • Money Flow Index

  • Larry Williams’ Accumulation/Distribution Line

  • Marc Chaikin’ Accumulation/Distribution Indicator

  • Chaikin’s Money Flow

  • Volume Rate of Change

  • Ease of Movement

  • Positive Volume Index/Negative Volume Index

  • Volume-Weighted MACD

  • Klinger Oscillator

  • Aspray’s Demand Oscillator

Consideration When Using Tick Data to Calculate Technical Analysis Indicators

Tick data represents the most detailed form of data, capturing every price fluctuation of a security within a specific time period. It includes all transactions made, enabling investors to monitor even the smallest price changes. Additionally, it incorporates information on price and volume for bid/ask (3 price increments for securities listed on HSX and 10 price increments for securities listed on HNX).

The data used for technical analysis indicators consists of OHLC data. OHLC stands for Open - High - Low - Close, which is a common data format used to depict the price movements of an asset over fixed, uniform time intervals (such as 1 minute, 5 minutes, 1 hour, 1 day). OHLC data is derived from tick data, using solely matched transaction information. It comprises five primary pieces of information:

  • Opening price (Open): The first matched price within the period under consideration.

  • Highest price (High): The highest matched price within the period under consideration.

  • Lowest price (Low): The lowest matched price within the period under consideration.

  • Closing price (Close): The final matched price within the period under consideration.

  • Trading volume: The total volume of matched trades within the period under consideration.

When using technical analysis indicators, investors must first select an analysis time frame, such as 1 minute, 5 minutes, 1 hour, or 1 day, to convert tick data into OHLC data before calculation. 

The chosen time frame is a critical parameter that determines the effectiveness of the technical analysis indicator. The selection of an appropriate time frame depends on the investor's investment time horizon. For short-term investments and frequent trading, investors may opt for shorter analysis time frames such as 1 minute, 5 minutes, or 1 hour. Conversely, for long-term investments and less frequent trading, investors may prefer longer analysis time frames such as 1 day, 1 week, or 1 month. Selecting the appropriate analysis time frame will enable investors to accurately assess market trends and make effective trading decisions.

The Application of Technical Analysis Indicators in Algorithmic Trading

Technical analysis indicators are precise calculations with specific outcomes, making them readily applicable to algorithmic trading. However, a deep understanding of each indicator's nature, its measurement function and operational mechanics is crucial in developing an effective trading algorithm.

In addition to employing existing formulas, algorithmic traders can create many other indicators based on their investment expertise and experience. By expanding data sources and adopting innovative calculation methods, algorithmic traders can gain a competitive advantage over peers who rely solely on popular tools. For example, algorithmic traders can enhance their indicator calculations based on both bid price and bid volume data to obtain a more comprehensive view of market sentiment and predict more accurate price trends, compared to relying solely on matched price and matched volume data.