Stock market indicators are obtained by taking market data and manipulating it to try and learn more about the strength of a stock.
For each stock that trades in the stock market, at the end of a trading day, there are only six pieces of critical information about what went on. They are:
The opening price: this is the price of the first transaction
The high: this is the highest price of the day
The low: this is the lowest price of the day
The close: this is the price of the last transaction for the day
The volume: this is the number of shares that changed hands during the day
Number of trades: This identifies the number of transactions between buyers and sellers. One place to get this information is the StockScores website featured in the stock trading website section.
Most data vendors and stock trading websites provide the first five pieces of information and from this hundreds of stock market indicators have been developed. Traders use this information to help them identify good buying and selling points.
The data coming from the market can be divided up into two main areas:
- are considered to be leading indicators
- try to predict the future direction of a stock
- popular oscillators are stochastic, relative strength index (RSI) and Williams %R
- are considered lagging indicators
- they turn after the stock
- popular trending indicators are moving averages, moving average convergence and divergence (MACD) and on balance volume (OBV)
While many people originally think that they can beat the stock market just by using more information too many indicators on your stock market charts can cause confusion.
A weekly candlestick stock chart covering three years of trading for ENGlobal (ENG) is shown below.
Chart courtesy of Stockcharts.com
The 30-week exponential moving average (EMA, blue line) is plotted on the same section of the chart as the stock price. You can easily see that the stock price turns before the EMA does. This is why a moving average is considered to be lagging.
Just below the price chart is the volume (black and red lines) that the stock is trading each week. You can see that recently (August 2005) the volume has been increasing. The volume recorded during the first week in August 2005 was a new three year high at over seven million shares.
The bottom histogram is a moving average convergence and divergence (MACD) histogram (blue histogram at the bottom of the chart). It measures the differences between two moving averages. A divergence between the histogram and stock price indicates there is a potential for a reversal in the stock price. For instance, the highs seen in April 2006 were not met with higher highs in the MACD histogram. Soon after the stock dropped. Also, the lows seen in October 2004 were not met with lower lows in the MACD and shortly after the stock started to rise.
Price should generally be used to confirm any stock market indicator.
If you want to know more about indicators please go to the book review section and read Steven B. Achelis's, "Technical Analysis from A to Z".