The Three Most Popular Technical Trading Tools

 

Investors looking to remove the emotion associated with trading their hard-earned dollars need to rely heavily on price and volume patterns as well as other technical indicators. Three of the most well-known technical indicators will be discussed here, each of which can provide support for a new trading decision or hints as to where one might find a trading opportunity.

The three most popular technical analysis indicators are:

1. Moving Average. The moving average (or MA) provides insight as to the whether the underlying security (be it a stock or commodity). Depending on the average being used, the specific point where the security is trading could be considered overbought or oversold and can make or break a trading position. Obviously, traders will enter a position with caution if the moving average does not support the security price. With that said, the Moving Average is considered one of the most heavily relied upon technical indicators.

2. Bollinger Bands. Bollinger Bands us a moving average as well as the security’s standard deviation to provide a visual representation of the range in which a security price should trade. These three lines represent the high, mid, and low point where the security should be. Obviously, if the security finds itself trading at or above the high band, then a trader is more apt to steer clear of going long. Likewise, if the security is trading below the lower band it is quite likely he or she will avoid a short position.

3. Head and Shoulders Formation. As a classic technical indicator, the head and shoulders formation is one of the most reliable tools in the technical analyst’s toolbox. Given its highly reliable nature, many traders will positions based on this indicator alone. Briefly, the head and shoulders formation is a series of three peaks or valleys (depending on whether it is a bullish or bearish indicator) that has added strength based on the underlying security’s volume patterns.

Despite technical analysis removing the emotion from any given trade, it does not stand on its own in terms of whether to buy long or sell short. Investors still need to rely on fundamental analysis to support their trading decisions. Much of this fundamental information can be located for free online.

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