What Is a Stock Market Indicator?
Today, millions of traders and investors around the world use technical indicators to make buy and sell decisions on stocks, commodities and currencies. While they are not the be-all and end-all of technical analysis, technical indicators are an excellent, easy-to-use tool that every trader should be aware of.
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History
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Stock market indicators are a relatively modern phenomenon. They have developed in part because of the increasing use of data mining and statistics in all areas of business. The information technology revolution of the last 20 years has also made it possible for even simple personal computers to process the large amount of numbers required to create indicators.
Significance
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Stock market indicators have revolutionized the way market participants trade the market. Now, rather than merely trying to follow price trends on graphs, traders have at their disposal a variety of tools for showing whether stocks are overbought, oversold and whether volume confirms price action.
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Function
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The primary function of stock market indicators is to augment the traditional technical analysis practices of chart reading and trend diagnosing. For example, oscillator-type indicators like the Relative Strength Index (RSI) can be used to spot oversold conditions within an uptrend, creating an excellent buy signal.
Types
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There are several different types of stock market indicators. Some measure a stock's momentum, others measure its volatility, and still others focus on whether an equity is overbought or oversold relative to its recent price.
Theories/Speculation
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Some financial commentators have suggested that the millions of traders who base their buying and selling decisions off popular indicators like Full Stochastics, the RSI, and the Moving Average Convergence Divergence (MACD) actually create a self-fulfilling prophecy, by which the indicators themselves create price action, rather than merely just measure it.
Warning
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All stock market professionals warn that it's imperative to never trade stocks off indicators alone. It is absolutely crucial to maintain a complete picture of a stock's technical price pattern, and use indicators to supplement this chart analysis, not replace it.
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