Stock Market

Top 5 Technical Indicators for Stock Analysis

Created on 05 Feb 2022

Wraps up in 7 Min

Read by 6.7k people

Updated on 22 Jul 2022

As a child, there were rarely any times when I was given full reign of the remote control of the T.V. remote. My parents didn’t want me watching too many “mind-numbing” cartoons, as a result I was either monitored when watching what I liked, or I was watching what most elders think children should learn to watch.

While I enjoyed NatGeo and Discovery, news was the bane of my existence (too agitating, too quick).

A moment of respite came in the form of weather reports. The CGI map of India and the little sun, cloud or thunder cloud popping over various states. Maybe it was the lack of agitation, or maybe I just reaalllyyyy liked cartoons, but weather reports were cool.

Personal anecdotes aside, what I’m trying to say is that the conveyance of information is not just dependant on the quality of information but the method of transmission as well. In case of shares,  people often engage in trading or short term investments where they need information about the prices more than the business itself.

For these traders, technical analysis of stocks is an integral task and technical indicators are the tools necessary for the proper interpretation of the information provided by technical analysis. Today we learn a little about technical analysis and the top 5 technical indicators that help in the analysis process.

What is technical analysis?

Technical analysis is the interpretation of aspects of the stock market that affect the prices of the shares. Technical analysis is a price-centric approach to the stock market, as opposed to value analysis that pays closer attention to the qualitative aspects of the business of the stock.

The process usually does not consider the business's intrinsic value when analysing stocks. Whereas the aspects external to the business like market trends of demand and supply, Government policies, etc., are considered when selecting stocks to study and transact in.

Technical analysis also deals with market psychology to attempt to forecast its behaviour. This helps in finding out the entry and exit points for stock trading. This method is relevant because it is said that the price movements happen due to buying and selling of the stocks, which happens to absorb all the information available in the market. This helps calculate whether the stock is undervalued or overvalued. Based on this information, investors or traders can formulate their strategy or position in the market.

Technical analysis studies and interprets trends in the price movements of shares as technical analysts believe that when it comes to price movements due to market psychology, “History repeats itself.” This means that if one keeps a keen eye on the market, they will see that the prices move in a certain way, and most of these changes appear in repeating patterns.

The foundation of technical analysis is laid on two significant pillars; time frame and technical indicators. The time frame can vary from as little as 5 to 15 minutes (for Intraday trades) to days, weeks, or even months. Technical indicators are the tools analysts and investors use to read past price movements and attempt to make educated forecasts of future possibilities.

Myths about technical analysis 

Wherever there is light, there are shadows. Similarly, wherever there is information, there are myths that exist due to a lack of said information. With technical analysis, too, there are myths involved, but worry not, for as long as Finology exists, financial myths shall be squashed left and right.

The most popular myth is that technical analysis is for intraday traders only. The reality is that all types of traders and investors can use it to find the appropriate entry and exit points. Value investors usually follow an “invest and forget” strategy, which works well without a doubt. However, investors can use technical analysis to find the correct exit prices and re-invest at lower prices to significantly improve their margins, while staying true to their long term investment ways.

Another myth is that it is used only by retail investors. But investment banks and hedge funds have dedicated teams that conduct technical analysis before making any investment decision. People also think that technical analysis accurately predicts the future price. It provides the price range and range for predictions within which the price may be in the future if the investors have used the right indicators. 

Importance of technical analysis 

Technical analysis is relevant for traders as it helps interpret and keep up with the momentum of the market trends. It makes predictions of market reaction easier in the future. The main job is to forecast the future direction with the help of past prices and volumes in trading. It helps complement the findings of fundamental analysis and then make better investment decisions. 

Technical analysis is used in stock trading and currency, derivatives, and commodities trading. This analysis also helps in risk management. It minimises the risk of investors by interpreting the market psychology. It facilitates predicting the future reaction of the traders. It also helps minimise the loss of the investors by recommending the price levels to place orders like stop loss and targets for the positions taken as per the investors’ risk appetite. 

Top 5 technical indicators for stock analysis

The technical indicators are broadly divided into two categories: overlays and oscillators. Overlays are where the indicators use the same scale as the top prices while oscillators move between the top and bottom ranges. 

  1. Average Directional Index

It is also known as ADX. It helps measure the strength and the momentum of the trends going on in the market. An ADX score greater than 40 means that there is a lot of directional strength in the market. The price will continue to move in the direction it is currently moving in.

If the ADX score is less than 20, then the trend is considered weak and means that the price might not move in the same direction as it has been. The main line in this indicator is ADX which is coloured black, with two additional lines, DI+ and DI-, which are coloured green and red, respectively. 

When ADX is above 20 and DI+ is above DI-, the phenomenon is called an uptrend. A downtrend is observed when ADX is above 20 and DI- is above DI+. 

  1. MACD 

It stands for Moving Average Convergence Divergence. It provides multiple trade signals to the investors. If MACD is above zero, it means that the stock will move upward and has a bullish view, while when MACD is below zero, it means there is a bearish period, and the price is expected to go down.

This indicator consists of 2 lines: MACD and the signal line. The signal line moves slower than the MACD line. The moment MACD crosses the signal line from above, it showcases an uptrend in the prices. When it crosses the signal line from below, the price is expected to fall further. With this information, investors can decide if they want to buy or sell in the stock market. 

  1. RSI

It stands for Relative Strength Index. It ranges from zero to a hundred. It helps in understanding the strength of momentum and the trend currently going on in the market.

RSI shows if a share is overbought or oversold. When RSI is more than 70, it showcases that the underlying asset has been overbought, and it is expected to fall. When RSI is moving below 30, assets are oversold and can move upwards in the coming trading cycle.

Divergence in RSI is also a sign. If the RSI indicator opposes the actual market behaviour, the current market trend is losing its strength and is expected to reverse soon.

  1. Stochastic Oscillator

This indicator compares the current price with price ranges in different time periods. It is also plotted between zero and hundred. If the oscillator trend is moving up, it is expected that the stock will make new highs. And in the downtrend, it will make new lows in the stock market. If it gives a reading below 20, the market is in an oversold condition, while a reading above 80 showcases the overbought market. 

  1. Bollinger Bands 

This indicator provides the range in which the stock prices will typically move. The width of the range increases or decreases depending on the existing volatility in the market. If the band is narrower, it shows that the volatility in the market is quite low. The wider band implies the higher perceived volatility in the market. This provides a signal when the asset is ranging outside its band. When the price moves outside the upward band, it means that the asset has been overbought. On the other hand, it could be oversold; it could be oversold when the price moves below the downward band.  


These are our picks for the top technical indicators. These are by no means the only indicators available or solely suitable for you. To better understand which indicator suits your needs, you need a better understanding of the process of technical analysis itself.

So how excited would you be if we told you that the oh so daunting and seemingly very tough technique of technical analysis was turned as easy as pie for you? If the answer is very, well then get excited because Finology Quest has brought for you a course called Basics of Technical Analysis to get you started on your trading journey.

Technical analysis gives you a visual depiction of the price history, making it easier for you to comprehend market reactions. Armed with the proper knowledge from Quest and a better understanding of the process and tools, you can rest assured that your trading days will have a well informed start.

Like we said before, these aren’t the only indicators, and you may use various others to suit your needs. Comment below to tell us about your arsenal of technical indicators that you use for your stock analysis. Happy Investing!

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Kanishka Tayal

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Kanishka is a finance enthusiast, currently pursuing her master's in Banking and financial services domain. She loves to doodle in her spare time. She is a keen learner and is willing to pursue her career as a financial analyst.

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