If you’re planning to dip your toes into the world of trading, it’s important to understand the fundamentals of the trade. One of the primary things that every trader should know is how to read technical indicators. These indicators are statistical tools that can help you determine the direction of the market and identify trade opportunities.
In this article, we’ll be deconstructing the various technical indicators that are commonly used in trading. But before we dive into that, let’s first discuss how you can open a trading account.
Opening a Trading Account
Before you can start trading, you need to open a trading account. This is a relatively simple process, and there are a number of online brokers that you can choose from. Some of the factors that you should consider when choosing a broker are their fees, their platform, their customer service, and the asset classes that they offer. Once you’ve chosen a broker, you’ll need to fill out an application form and provide some basic personal information such as your name, address, and date of birth.
After you’ve completed the application, the broker will need to verify your identity and your financial information. This may involve providing copies of your ID, a utility bill, and your bank statements. Once your account is verified, you can fund it and start trading.
Understanding Technical Indicators
Now that you have a trading account, let’s move on to technical indicators. Technical indicators are mathematical calculations based on the price and volume of a security. They’re often displayed as charts or graphs and are used to help traders make decisions about when to buy or sell a security.
Below are some of the most used technical indicators in trading:
Moving Averages
A moving average is a line that indicates the average price of a security over a specified period of time. Traders use moving averages to identify trends and determine the direction of the market. A common strategy is to buy when the price of a security crosses above its moving average and to sell when the price crosses below it.
Relative Strength Index (RSI)
The RSI is a momentum indicator that compares the size of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI is often displayed as a line graph and can range from 0 to 100. If the RSI is above 70, it’s considered overbought and if it’s below 30, it’s considered oversold.
Bollinger Bands
Bollinger Bands are a volatility indicator that consist of an upper and lower band that are two standard deviations away from a security’s moving average. The bands widen when the market is more volatile and narrower when it’s less volatile. Traders often use Bollinger Bands to identify potential breakouts and reversals.
Moving Average Convergence Divergence (MACD)
The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The indicator consists of two lines: a MACD line and a signal line. Traders use the MACD to identify trends and to determine the momentum of the market.
Summary
Technical indicators are an essential tool for every trader and understanding how to read them can help you make more informed trading decisions. The above indicators are just a few of the many technical indicators that are available to traders. By using multiple indicators and analysing them together, you can gain a better understanding of the market and increase your chances of making successful trades. Remember, however, that technical indicators should be used as a supplement to your own analysis and should never be relied on solely to make trading decisions.
