Technical analysis, the study of chart patterns, is a tool that helps traders increase their edge over others.
This is done by keeping the trader on the right side of the trend and providing warnings when the trend is about to reverse. There are many indicators and patterns that can accomplish this task but there is no one particular indicator that fits the bill for all market conditions.
Therefore, traders prefer to use a combination of indicators, which come in handy both during trending and range-bound markets. However, this does not mean the trader should clutter every chart with all the available indicators. In some cases, using too many indicators will only hamper the decision-making process and create confusion rather than assist the trader.
As traders develop their chart reading skills, they tend to reduce the number of indicators and use the ones that are more suited to their style of trading. Here again, there is no perfect set of indicators that will give better results than others, it is just a matter of preference and practice.
In this article, the set of indicators that will be discussed are moving averages and the relative strength index. Without going too deeply into the technicalities of each indicator, the basic ways of using them effectively will be highlighted. The methods discussed here are in no way complete, there are myriad other possibilities and traders can use the ones that work best for them. The explanation can be used as a guide for honing the analyzing skills further.
Moving averages are trend-following or also called lagging indicators as they provide delayed feedback after the price movement has already occurred. The most popular time frames that are used for trading and investing are the 20, 50, and 200-period moving averages. Short-term traders also use the 5 and 10-period moving averages but they tend to whipsaw and may not be suitable for everybody.
There are four types of moving averages: simple, exponential,…