Trading with Technical Analysis Indicators

Part of the Day Trading For Dummies Cheat Sheet

Using technical analysis, day traders often look for patterns in recent prices and trading volume to determine whether a security is likely to do especially well or especially poorly. Here are brief definitions of some technical indicators you're likely to come across:

  • Average true range: The true range is found by calculating the exponential average of the difference between the higher of today's high and yesterday's close and the lower of today's low and yesterday's close. Average these for 14 days, and you get the average true range. Usually, you sell a security trading at or above the high and buy one trading at or above the low.

  • Bollinger Bands: A Bollinger Band is a trading limit set at two standard deviations above and below the 20-day moving average of a security. Traders look to sell near the top of the band and buy near the bottom.

  • Commodity Channel Index (CCI): This technique is used to identify seasonal turns in agricultural commodities and other securities that have different supply and demand levels during the course of the year. When a security goes above the CCI, it's probably time to sell.

  • Momentum: Traders looking for momentum buy securities that are going up in price if the volume traded is also going up, and they sell securities that are going down in price if the volume traded is going down.

  • Relative Strength Index (RSI): The Relative Strength Index is the average of the number of upward price movements in a period divided by the average of the number of downward price movements. The higher the RSI, the more interested people are in buying rather than selling.

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