Indicators are used as a measure to gain
further insight into to the supply and demand of securities within
technical analysis. Those indicators (such as volume) confirm price
movement, and the probability that the move will continue. The Indicators can
also be used as a basis for stock trading, as they can create buy-and-sell
signals.
1. On-Balance
Volume
The on-balance volume indicator (OBV) is used to measure the
positive(+) and negative(-) flow of volume in a security, relative to its price
over time. It is a simple measure that keeps a cumulative total of volume by
adding or subtracting each period's volume, depending on the price movement.
This measure expands on the basic volume measure by combining volume and price
movement. The idea behind this indicator is that volume precedes price
movement, so if a security is seeing an increasing OBV, it is a signal that
volume is increasing on upward price moves. Decreases mean that the security is
seeing increasing volume on down days.
2. Accumulation/Distribution
Line
One of the most commonly used indicators
to determine the money flow of a security is the accumulation/distribution line (A/D line). It is similar to
on-balance volume indicator but, instead of only considering the closing price
of the security for the period, it also takes into account the trading range
for the period. This is thought to give a more accurate picture of money flow
than of balance volume. The line trending up is a signal of increasing buying
pressure, as the stock is closing above the halfway point of the range. The
line is trending downward is a signal of increasing selling pressure in the
security.
3. Average Directional Index
The average
directional index (ADX)
is a trend indicator used to measure the strength and momentum of an existing
trend. This indicator's main focus is not on the direction of the trend, but
with the momentum. When the ADX is above 40, the trend is considered to have a
lot of directional strength - either up or down, depending on the current direction
of the trend.
Extreme readings to the upside are considered to be quite rare compared to low
readings. When the ADX indicator is below 20, the trend is considered to be
weak or non-trending.
