11/25/23, 12:06 PM Best Technical Indicators for Rookie Traders

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TRADING TECHNICAL ANALYSIS

Top Technical Indicators for Rookie

Traders
By ADAM BARONE Updated February 20, 2022
Reviewed by CHARLES POTTERS
Fact checked by PETE RATHBURN

Starting out in the trading game? Looking for the best technical indicators to
follow the action is important. It affects how you’ll interpret trends—both on
positions and in the broad averages—as well as the type of opportunities that
pop up in your nightly research. Choose wisely and you’ve built a solid
foundation for success in speculation. Choose poorly and predators will be
lining up, ready to pick your pocket at every turn.

KEY TAKEAWAYS
In general, technical indicators fit into five categories: trend, mean
reversion, relative strength, volume, and momentum.
Leading indicators attempt to predict where the price is headed while
lagging indicators offer a historical report of background conditions
that resulted in the current price being where it is.
Popular technical indicators include simple moving averages (SMAs),
exponential moving averages (EMAs), bollinger bands, stochastics, and
on-balance volume (OBV).

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Novice Trading Strategies

Most novices follow the herd when building their first trading screens, grabbing
a stack of canned indicators and stuffing as many as possible under the price
bars of their favorite securities. This "more is better" approach short circuits
signal production because it looks at the market from too many angles at once.
It’s ironic because indicators work best when they simplify the analysis—cutting
through the noise and providing usable output on-trend, momentum, and
timing.

Instead, take a different approach by breaking down the types of information

you want to follow during the market day, week, or month. In truth, nearly all

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11/25/23, 12:06 PM Best Technical Indicators for Rookie Traders
technical indicators fit into five categories of research. Each category can be
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further subdivided into leading or lagging. Leading indicators attempt to
predict where the price is headed while lagging indicators offer a historical
report of background conditions that resulted in the current price being where
it is.

Trend indicators (lagging) analyze whether a market is moving up, down, or

sideways over time.
Mean reversion indicators (lagging) measure how far a price swing will
stretch before a counter impulse triggers a retracement.
Relative strength indicators (leading) measure oscillations in buying and
selling pressure.
Momentum indicators (leading) evaluate the speed of price change over
time.
Volume indicators (leading or lagging) tally up trades and quantify whether
bulls or bear are in control.

So, how can a beginner choose the right setting at the start and avoid months
of ineffective signal production? The best approach in most cases is to
begin with the most popular numbers—while adjusting one indicator at a time
—and seeing if the output helps or hurts your performance. Using this method,
you’ll quickly grasp the specific needs of your level.

Now that you understand the five ways that indicators dissect market action,
let’s identify the best ones in each category for novice traders.

Trend Indicators
50-Day EMA and 200-Day EMA

Image by Sabrina Jiang © Investopedia 2020

We’ll start with two indicators that are embedded within the same panel as the
daily, weekly, or intraday price bars. Moving averages look back at price action
over specific time periods, subdividing the total to create a running average
that’s updated with each new bar. The 50- and 200-day exponential
moving averages (EMAs) are more responsive versions of their better-known
cousins, simple moving averages (SMAs). In a nutshell, the 50-day EMA is used
to measure the average intermediate price of a security, while the 200-day EMA
measures the average long term price.

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U.S. Oil Fund (USO)’s 50- and 200-day EMAs rose steadily into the summer of
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2014, while the instrument pushed up to a 9-month high. The 50-day EMA
turned lower in August, with the 200-day EMA following suit one month later.
The shorter-term average then crossed over the longer-term average (indicated
by the red circle), signifying a bearish change in trend that preceded a historic
breakdown. [ 1 ]

Mean Reversion Indicators

Bollinger Bands
USO buying and selling impulses stretch into seemingly hidden levels that force
counter waves or retracements to set into motion. Bollinger bands (20, 2) try to
identify these turning points by measuring how far price can travel from a
central tendency pivot—the 20-day SMA in this case—before triggering a
reversionary impulse move back to the mean.

The bands also contract and expand in reaction to volatility fluctuations,

showing observant traders when this hidden force is no longer an obstacle to
rapid price movement. [ 2 ]

Relative Strength Indicators

Stochastics

Image by Sabrina Jiang © Investopedia 2020

Market movement evolves through buy-and-sell cycles that can be identified

through stochastics (14,7,3) and other relative strength indicators. These cycles
often reach a peak at overbought or oversold levels and then shift in the
opposite direction, with the two indicator lines crossing over. Cycle alternations
don’t automatically translate into higher or lower security prices as you might
expect. Rather, bullish or bearish turns signify periods in which buyers or sellers
are in control of the ticker tape. It still takes volume, momentum, and other
market forces to generate price change.

SPDR S&P Trust (SPY) oscillates through a series of buy-and-sell cycles over a 5-
month period. [ 3 ] Look for signals where:

1. A crossover has occurred at or near an overbought or oversold level

2. Indicator lines then thrust toward the center of the panel.

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11/25/23, 12:06 PM Best Technical Indicators for Rookie Traders
This two-tiered confirmation is necessary because stochastics can oscillate near
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extreme levels for long periods in strongly trending markets. And, while 14,7,3 is
a perfect setting for novice traders, consider experimenting to find the setting
that best fits the instrument you are analyzing. For example, experienced
traders switch to faster 5,3,3 inputs.

Momentum Indicators
MACD

Image by Sabrina Jiang © Investopedia 2020

Moving average convergence divergence (MACD) indicator, set at 12, 26, 9, gives
novice traders a powerful tool to examine rapid price change. This classic
momentum tool measures how fast a particular market is moving while it
attempts to pinpoint natural turning points. Buy or sell signals go off when the
histogram reaches a peak and reverses course to pierce through the zero line.
The height or depth of the histogram, as well as the speed of change, all interact
to generate a variety of useful market data.

SPY shows four notable MACD signals over a 5-month period. The first signal
flags waning momentum, while the second captures a directional thrust that
unfolds right after the signal goes off. The third signal looks like a false reading
but accurately predicts the end of the February–March buying impulse. The
fourth triggers a whipsaw that’s evident when the histogram fails to penetrate
the zero line.

Volume Indicators
On-Balance-Volume (OBV)

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Image by Sabrina Jiang © Investopedia 2020

Keep volume histograms under your price bars to examine current levels of
interest in a particular security or market. The slope of participation over time
reveals new trends—often before price patterns complete breakouts or
breakdowns. You can also place a 50-day average of volume across the
indicator to see how the current session compares with historic activity.

Now add on-balance volume (OBV), an accumulation-distribution indicator, to

complete your snapshot of transaction flow. The indicator adds up buying and
selling activity, establishing whether bulls or bears are winning the battle for
higher or lower prices. You can draw trendlines on OBV, as well as track the
sequence of highs and lows. It works extremely well as a convergence-
divergence tool. For example, between January and April, Bank of America
(BAC) proved this when prices hit a higher high while OBV hit a lower high,
signaling a bearish divergence preceding a steep decline. [ 4 ]

The Bottom Line

Choosing the right technical indicators is daunting but can be managed if
novice traders focus the effects into five categories of market research: trend,
mean reversion, relative strength, momentum, and volume. Once they’ve
added effective indicators for each category, they can begin the long but
satisfying process of tweaking inputs to match their trading styles and risk
tolerance.

ARTICLE SOURCES

PART OF

Guide to Swing Trading

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Moving average convergence/divergence (MACD) is a momentum indicator that shows the
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An inverse head and shoulders, also called a head and shoulders bottom or a reverse
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