Knowing which indices to track is very crucial in indices trading in order to make sound decisions. For an efficient assessment of the market conditions, detection of trends, and prediction of the possible movements of index prices, successful traders use many indicators. However, despite thousands of indicators floating in the market, some are considered efficient and reliable in indices trading.
The Moving Average is probably the most widely utilized indicator. It smooths out price data over a given length of time so that patterns come out clearly and obviously. There are two main types of moving averages widely used: simple moving average and exponential moving average. Perhaps the best benefit of moving averages is that they can indicate to the trader whether an index is trending upward, downward, or sideways. Above the moving average may indicate the trend is upward, while a price below the moving average may be a sign of a downtrend.
Relative Strength Index (RSI) is one other very important tool used in indices trading. This momentum oscillator is used to measure the speed and change of price movements for identifying overbought or oversold conditions in an index. The reading of RSI varies between 0 and 100, and readings above 70 generally indicate overbought, whereas readings below 30 suggest being oversold. Traders make predictions about possible reversals or confirm trends with this information. For example, a regular trend on the RSI crossing above 70 makes most people trade anticipating either a price correction or a pullback.
Another widely followed indicator among the trades is the Bollinger Bands. It typically consists of a middle band normally the 20-day simple moving average and upper band and lower band. It gives the distance between the upper and lower bands in view of volatility in the markets. The upper band will be overbought if price moves toward it, while a move toward the lower band may indicate that price is oversold. The bands widening might also indicate growing volatility, or it may provide a hint that a big market move is ahead.
Volume is the other significant element in trading indices. Volume is the number of shares or contracts traded in a particular period and usually is used together with other indicators. The volume can further confirm the strength of the price movement. For instance, a price rise with high volume tends to be more supporting than one with low volume. Volume surges can also coincide or precede market turns or shifts in investor attitude.
Lastly, the MACD is useful for the followers of trends. The MACD plots the relationship between two moving averages, the 12-day and 26-day EMAs. A buy signal occurs when the MACD line crosses upward from below the signal line. The sell signal is sent when it crosses downward from above the signal line. A histogram that represents the difference in values of the MACD line and the signal line can provide additional information as to how strong the trend is.
Each of these indicators gives a different view of the market conditions. When combined, they can give an even more well-rounded image on how trade decisions can be made with more confidence in indices trading. Whether it’s the quest for entry and exit points or determining market sentiment, each of these indicators represents some of the best gauges available for successful trading.
