4 Common Indicators to Help You Spot Profitable Trades

Investing in the stock market always carries some level of risk. Market prices can change quickly due to things like economic growth, the rate of inflation, and how well companies are doing. This makes it hard for investors to understand what’s happening in the market and make smart decisions about their money.

The number of trades placed per day had gone up to 3,905 trades in 2021, which speaks volumes about the raging popularity of trading. As the global online trading market is estimated to reach $13.3 billion by 2026, it’s really important that investors learn about the market and carefully consider their decisions to avoid losing a lot of money.

If you are into trading, technical analysis has to be an important aspect of your strategy planning. This involves using charts and calculations to understand price trends. These tools can help you see patterns and signals that might tell you when to buy or sell stocks. You can find out more about these tools by taking share market classes about the same.

In this article, we’ll discuss four tools that can help you understand the stock market before you invest.

4 important indicators to understand the share market 

Trading indicators help demystify the share market and allow traders to make a clearer analysis. Listed below are the four most commonly used trading indicators that you can learn if you start taking share market classes: 

1. Simple moving average (SMA): Simple moving average is a popular technical tool that is used for analysing the share market. It is a simple procedure that helps identify the trends of the financial markets. 

This tool shows how the price of something changes over time and creates a line that shows if the price is going up or down.  You can use this tool to see if something is a good investment for a short time or a long time. For example, you could use it to see how the price has moved over the last 20 days or over the last 200 days.

Procedure for calculating the simple moving average: Let’s say that an investor is calculating an average over a period of 20 days. For this, the trader has to take the closing prices each day, add them, and divide them by the total number of price points. 

1. Exponential moving average (EMA): This is another indicator that works like the simple moving average technique. While both create a smooth trendline based on recent price data, the EMA gives more weight to current prices. This makes the EMA a much faster and more responsive indicator, capable of spotting shifts in the market almost instantly. That’s why it’s a favourite tool for traders who play the short game, always on the lookout for quick opportunities.

Procedure for calculating the exponential moving average: To calculate the EMA, one first has to calculate the SMA for the same tenure. The SMA served as the previous EMA. 

Next, calculate the multiplier, which is the element used to stress more on the recent data. The formula to calculate the multiplier (M) is 2/(N-1), where N is the number of days for which you want to calculate the EMA. 

Finally, the EMA value can be calculated using the formula: 

EMA= (Current price * M) + [Previous EMA * (1-M)

1. Moving average convergence divergence: The moving average convergence divergence(MACD) is a kind of comparative study of two moving averages to understand whether the prices are moving closer to one another, or growing apart. This shows how much the price is changing.  If the prices are getting closer, it means the price change is slowing down. If the prices are moving further apart, it could mean the price change is getting stronger. This indicator helps traders decide when to buy or sell based on how the prices are changing.

Procedure for calculating the moving average convergence divergence: To find the MACD line, you subtract the average price over 26 periods from the average price over 12 periods. Then, you calculate the average of the MACD line over 9 days, which is called the signal line. You plot the signal line on the MACD line to see if it’s a good time to buy or sell stocks.

1. Standard deviation: As the name suggests, the standard deviation indicator is used to determine how spread or dispersed the prices are from the average value. This indicator helps in determining the market volatility and understanding price fluctuations. While a low SD indicates a narrow range, a high value of SD shows that the prices are swinging wildly. 

Procedure for calculating the standard deviation: Let’s consider a period of 20 days. To begin with, you will have to calculate the average price for the period by taking into consideration the closing price of each day. The day’s deviation can be calculated by finding the deviation between the average price and the closing price of the day. 

After this, each day’s deviation value has to be squared. The result then has to be divided by the number of days of the period we are considering, that is, 20 in this case. Finally, finding the square root of the result will help us find the standard deviation.

There are plenty of other indicators; you can learn more about them by signing into share market classes. 

Final words

It is, therefore, evident that trading indicators are essential tools that equip traders with the sense of analysing market trends and volatility, thereby reducing the risk of uninformed decisions. By effectively mastering these skills, an investor can greatly improve the strategy and timing of investment. Enrolling on share market classes can teach you about more such indicators and empower you with the skills needed for successful trading. 

A financial modelling course can help you grasp Excel’s basic and advanced concepts for application across real-life scenarios. Enrol in the Financial Modelling and Valuations classroom bootcamp or the online course offered by The WallStreet School, India. The program includes basic, intermediate, and advanced Excel alongside a comprehensive financial modelling and valuations curriculum. Both the online and classroom bootcamp programs include placement assistance for enrolled candidates. 

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FAQs:

• Can technical indicators guarantee trading results?

No, technical indicators cannot guarantee trading results. They can merely tell investors about the condition of the market so that they know how to position their investments and make decisions wisely. 

• What is the best trading indicator?

There isn’t a single indicator that can offer optimum results and can be termed as “the best”. Indicators work as tools that help to understand the market trends, volatility, momentum, and other factors that govern the investment decisions of investors. 

• Which is more reliable SMA or EMA?

It is entirely an investor’s preference whether they want to use SMA or EMA. While EMA is preferred by short-term traders for its promptness, long-term traders tend to count more on SMA.