In last week’s blog posting we began a discussion of technical indicators for the stock market which are widely used. My purpose is to assist my fellow advisors in any way possible in the task of portfolio management, an area of significant concern these days. Here is a list of the first five indicators, a hyperlink to each for more information, and four more indicators you may want to consider.
Technical Indicators One Through Five
1) Accumulation/Distribution Line. For more information, click here
2) Average Directional Index (ADX). For more information, click here
3) Relative Strength Index (RSI). For more information click here
4) Average True Range (ATR). For more information, click here
5) Parabolic SAR (PSAR) For more information, click here
Technical Indicators Six Through Nine
This week we will discuss the following four technical indicators.
This, like several of last week's indicators is used to identify trends in securities. However, the Aroon also provides insight into the likelihood of a trend reversal. It contains two lines: one to measure the strength of the uptrend and the other for the downtrend. Click here for definition
The Aroon Oscillator is a product of the Aroon in that it uses the two lines in the latter to gauge the strength of the trend and the likelihood of a reversal. Click here for definition
MACD (Moving Average Convergence Divergence)
This indicator is used to determine the relationship between two exponential moving averages (EMA). It begins by calculating the MACD which is the difference between the 26 day and the 12 day EMA. Then, the nine day EMA is placed on top of the MACD and becomes a trigger for buying and selling decisions. Click here for definition
On Balance Volume (OBV)
The OBV is a momentum indicator that uses the flow of volume to predict the change (directionally) in the price of a security. Click here for definition
These are just some of the many technical indicators used today. The purpose of each varies slightly, but in essence, they are intended to provide assistance with trading.
I'm not using the term ‘trading’ here to indicate day-trading. I am referring to making the decisions we make when deciding to buy and sell in the course of our normal portfolio management process. It's important to emphasize that no single indicator should be used in a vacuum. Rather, an advisor should use several trend indicators to confirm that a trend is indeed in place and that all indicators are pointing in the same direction.
There can be many false reads when using indicators, causing one to buy or sell when they would have been better off doing nothing. The links I have provided will give you a basic idea of each indicator discussed. However, for those of you interested in pursuing this further, please see the StockCharts.com-ChartSchool website. It will allow you to take a deeper dive into each indicator so you may become more adept with those you select. Just type in the indicator you are seeking and you'll find a wealth of information on each.
Thanks for reading and have a great week!