Must-Know Technical Indicators
Technical Indicators are often grouped with day-traders, Wall-Street quants, and many other people that are non-stop analyzing charts and executing trades like their life depends on it. For the average investor indicators such as the Moving Average or Relative Strength Index seem irrelevant and useless for stocks held long-term. However, technical indicators calculate important categories that track trends, momentum, volatility, and many more for the sole purpose of assuming what the future holds for that specific stock. This aligns perfectly with the goal of Monk Investments as a whole: simplifying the stock market. Time to learn!
Moving Average (MA)
Moving Averages in a nutshell "smooth out" the price data to identify patterns and trends overtime. This, as stated before, spots trends in up seasons and down seasons so it is possible to detect the general pattern of movement and create the identification of support and resistance levels in the stock. The two most common moving averages are the 200 day MA and 50 day MA. The relationship between two moving averages, called the moving average convergence divergence (MACD) is extremely useful, but more on that later!
Relative Strength Index (RSI)
RSI is a momentum oscillator (rate of change in price movement) tool that ranges from 0-100. Thus, measuring a stock based on whether it's overbought (closer to 100) versus oversold (closer to 0). Calculating this alongside the volatility of a stock can help loads when setting entries and exits for trades. The caveat of this indicator however is it only measures foot-traffic and not practical statistics; meaning a stock can be have a glowing overbought 70+ RSI but have fundamental statistics screaming that the stock is overvalued and most likely a sell.
Moving Average Convergence Divergence (MACD)
Though MACD has a much more menacing name than the recently learned moving average, it is exactly the same but double. It compares two different moving averages, such as the 200 day MA and 50 day MA. In fact, when these two cross in a negative pattern (the 50 day MA drops below the 200 day MA), it is called a "death cross" and usually means there is a lot of FUD (fear, uncertainty, and doubt) for that specific stock. With signs such as the death cross, this is specifically why technical indicators are so valuable. It takes the mind-numbing numbers and turns them into visible graphs that show what the majority of investors are doing.
On-Balance Volume (OBV)
OBV is a volume based indicator that will increase or decrease dependent on the amount trades executed for that specific stock. Most commonly used for pattern recognition within a stock. For example, Nvidia's (NVDA) OBV will skyrocket the day-of earnings like clockwork. Obviously, this shows that many people are getting involved in the stock or selling out of it because they have a sense of what the earnings may bring the next day. I've found the best use-case for OBV to be in the pre/after market alongside their percentage up/down to predict how many people are counting on the stock rallying or crashing.
All in all, don't let the "experts" or the day-trading stereotype turn you off to the idea of looking at technical indicators for a stock you are interested in. Instead, add technical indicators to your arsenal of stock fundamentals, practice using them, and subscribe for more helpful articles to improve your stock market mastery!