TECHNICAL INDICATOR, WHAT !

Technical indicators are easy to follow but having mastery over them need slightly deeper understanding of their functionalities. How they can be applied to a chart while trading, their inherent qualities and drawbacks.

TYPES OF TECHNICAL INDICATORS

Technical Indicators are basically of two types viz, Trend Indicators and Momentum Indicators.

Trend Indicators: These indicators signify the price movement in a certain direction, downwards or upwards. Few trend indicators are Trend Lines, Moving Averages, Bollinger Bands. Of them Trend Line is the most important one, thus explained elaborately.

TREND LINES:
A trendline is a straight line connecting significant support or resistance levels. In the above figure they are the green and red lines. Generally, a trendline can be drawn from as few as two support/resistance levels. However, the more support/resistance levels that are touching the trendline, the more stable the trend is. In order to clearly see trends, trendlines have to be drawn and identify levels of support and resistance. Trends do not move in straight lines, rather they zigzag in a general direction forming progressively higher or lower peaks. 
As the price reaches the immediate previous peak, the price of a currency pair or stock hits its resistance level , making it to dip. However, if the uptrend is significant, the price will move past resistance to make a higher peak. These highs within a trend are known as resistance levels.
As the price reaches the immediate previous trough, the price of a currency pair or stock hits its support level , making it to rise. However, if the downtrend is significant, the price will move past support to make a lower trough. These lows within a trend are known as support levels Just as the trends themselves, trendlines can be upward, downward or sideways. A trendline connecting a set of support levels is referred to as the line of support. A trendline connecting resistance levels is referred to as a line of resistance. Trendlines are always drawn from left to right.
Higher volume at a given support/resistance level, extensive repetition of support/resistance levels on the trendline and prolonged duration of trendline adherence all signify the markets determination to obey the trend and thus strengthen it. The more significant trends form at 45-degree angles. A sharper angle suggests an unsustainable rally and a shallower angle suggests that a trend may be close to reversal.


Trendline Penetration: Trendline penetrations, also known as violations or breaks, are key technical signals in determining the market’s future direction. They can mean that an existing trend is ready to reverse or change its characteristics. It is important to monitor market volume during a trendline penetration. High volume on a trendline penetration or the failure of consecutive support/resistance levels to exceed each other would be characteristic of the market’s determination to break out of or even reverse a trend.
Support Turns into Resistance or Resistance Turns into Support. Upon penetrating a firm line of resistance, the market often chooses to take up that very line of resistance as its new line of support. The reverse is also true, as lines of resistance often replace previous lines of support in cases of downward penetration. 


Channel Penetration: The channel line runs parallel to the basic trendline, joining the support levels in an upward trend and the resistance levels in a downward trend. If the price of the currency pair continuously oscillates between the trendline and the channel line then one can assume that a valid channel exists. The  channel is one of the most useful analytical patterns. Unlike the breaking of a trendline, which signifies possible reversal in the trend, the penetration of the channel line is a common indicator of expected acceleration of the already prevalent trend. A failure to reach the channel line on the other hand is an indication that the trend is failing and that price

Momentum Indicators: These indicators signify the momentum in a price movement in a certain direction, downwards or upwards. Few trend indicators are Moving Averages Convergence Divergence(MACD), RSI, Stochastics. MACD is one the frequently used momentum indicators ,thus explained here substantially.


THE MACD INDICATOR:
The Moving Average Convergence/Divergence indicator (MACD) is calculated by subtracting the value of a 26-period exponential moving average from a 12-period exponential moving average (EMA). A 9-period dotted exponential moving average, signal line, of the difference between the 26 and 12 period EMA is used as the signal line. The MACD is a computation of the difference between two Exponential Moving Average of closing prices. This difference is charted over time, alongside a moving average of the difference. The divergence between the two is shown as a histogram.
The Moving Average Convergence-Divergence (MACD) indicator is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds: trend following and momentum. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, center line crossovers and divergences to generate signals. A buy signal occurs when the MACD rises above its 9 period signal line and a sell signal occurs when the MACD falls below its 9-period signal line.
It is used to spot changes in the strength, direction, momentum, and duration of a trend in a stock price. lbelow its 9-period signal line

It is used to spot changes in the strength, direction, and duration of a trend in a stock's price.