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Better Trades > Stock Chart Basics > Indicators


An indicator is anything used to predict how a stock will perform in the future. Indicators are at the heart of technical analysis, which projects which direction a stock should be headed based on patterns, mathematical formulas and past results.

There are more than 100 indicators that traders can use, a number that's risen tremendously over the last 20 years with the advent of computers and the availability of the Internet. Most traders try to identify a handful of indicators that can be used to identify possible trades or confirm the findings. Never try to use too many indicators. Here are some of the more popular indicators used today:

Stochastics: This is useful for stocks that are channeling sideways. This indicator has a dotted line at the 20 percent mark and another at 80 percent. When the Stochastic lines cross the 80 percent line, it indicates the stock is overbought and may be ready to lose value. If the lines cross the 20 percent line, it indicates the stock is oversold and may be ready to increase in value.

Moving Averages: When a short-term moving average crosses a longer term moving average, it generally indicates a trend in that direction. It is also important to note when a stock moves through the longer term averages. A stock can also use a moving average as a support or resistance line.

MACD: This lagging indicator will show divergence. If the stock is going up, but the MACD is going down, there's a pretty good chance the stock will soon turn bearish. Bollinger Bands: These will squeeze together to show pressure building on the stock. As the pressure is released and the bands spread apart, the stock is likely to follow the upper band (a bullish move) or the bottom band (a bearish move).

Relative Strength Indicator: This indicator will move up or down with the stock, but is most useful when it hooks upward or downward, which might show a reversal of the current trend.

Cash flow: This indicator simply follows the money moving into the stock or leaving the stock. If cash flow moves up or down, it could indicate a change in the trend.

Stock Chart Basics


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