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What is a Technical Indicator?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 November 2016
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    Conjecture Corporation
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Technical indicators are elements that predict the future performance of stocks in a given set of market conditions. Sometimes used to predict short-term trends, a technical indicator often focuses on the upward or downward movement of price associated with a given stock. In other applications, a technical indicator may be analyzed in order to predict the next short term movement that will occur with a market in general.

Sometimes referred to as technicals, indicators of this type are often based on mathematical calculations which take into consideration the current relationship between the stock price and the general movement of the market where the stock is traded. This means that a technical indicator does not consider a number of other factors that often are of concern to the investor. Still, technicals do offer valuable insight into how a given stock is likely to perform in a short period of time.

Investors who choose to focus their trading activity on short term deals that involve a continual cycle of buying and selling in order to take advantage of market trends derive the most value from the use of a technical indicator. Because these types of indicators do focus on short term movement, they are ideally suited for a quick turnaround. Active traders of this type will consult any of the common technical indicators on a daily basis, if not several times a day.

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There are a number of respected technical indicator sources utilized by investors and brokers today. Among them are the Money Flow Index, the Relative Strength Index, and the MACD. It is not unusual for investors looking for insight into the best short-term investment deals to consult two or more of these indicators regularly, even cross referencing the data found in each of the various indexes. This activity of cross referencing can help to identify potential trades that may be identified by some of the indexes but not in others.

In general, a technical indicator is of little value to investors who are looking for long term options. This is because some of the factors that will influence stock movement in the long term, such as the financial stability of the issuer of the stock, general industry outlook, and the stability of the demand for the company’s products, are not considered technical indicators. Thus, investors focused on long term investments are likely to give a technical indicator little to no attention when making investment decisions.

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