Stock Market Indicators [What They Are, Types & Benefits]

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Getting involved with the stock market can seem like an intimidating pursuit. But the key is to learn about the fundamentals of the market to make informed trading decisions. Stock market indicators are helpful tools for understanding the market and getting started as an investor. This article addresses everything you need to know about these indicators.

What Are Stock Market Indicators?

These common indicators are quantitative analysis tools used by market analysts to interpret stocks or current status and future trends in the stock market. They are mathematical formulas and ratios used to predict how the market will move based on past patterns.

Market indicators are often confused with technical indicators, both of which are based on applying a statistical formula to a set of data points to make conclusions on market movements.

But while stock market indicators are a subset of technical indicators, they are primarily concerned with analyzing data points for multiple stocks (securities) instead of simply interpreting one specific stock. This helps analysts draw conclusions based on the overall market conditions instead of the performance of a single stock.

While market indicators might have their own names and interpretations, they are typically still based on indicators, such as price, volume, momentum, etc.

NOTE: Many of the best investment tools and platforms today come with indicator tools built into them. In the past, you would need to manually calculate, track, and plot these indicators based on your knowledge and the index price chart you were using. Now, you can simply choose which indicator(s) you wish to view, and it will automatically be plotted for you.

Types of Stock Market Indicators

Before considering individual indicators, it’s first helpful to understand the types of indicators. Traders typically use individual indicators to make conclusions about the market’s trend, momentum, volatility, and volume of the market. Based on these conclusions, predictions can then be made about how the market will continue to develop.

Trend

A stock trend indicator measures both the strength and direction (up/down) of a trend. A trend indicator typically uses some form of price averaging to establish a baseline. A trend moving up from baseline is bullish, while a trend moving down is bearish. Moving averages are the most common trend indicator used to determine support and resistance levels for a market movement.

Momentum

Momentum helps to establish the rate at which the price of a financial index is changing. It’s a simple calculation whereby you deduct the current closing price from the closing price a specific number of periods ago. You can then plot a chart using these values to identify the momentum change over time. Market analysts typically use 10-day periods for momentum calculation on indices like the S&P 500.

Volatility

These stock indicators look at changes in the market prices over a specified period to help traders detect points where the market may change direction. Volatility indicators are typically based on a difference in the highest and lowest historical prices. The more volatile the market is, the higher the unpredictability and risk. But it can also point out likely points for price changes/corrections.

Volume

Volume is used to measure the strength of a trend based on the underlying market activity. It generally employs some method of averaging or smoothing out the raw volume. More money flowing in and out of an instrument at any given time usually results in more substantial movements. Therefore, it’s helpful to confirm the direction of a trend or its sustainability but can also be used to identify tops and bottoms due to market saturation and incoming corrections.

NOTE: Trend, momentum, volatility, and volume stock market signals can further be divided under leading or lagging indicators. Leading indicators try to predict trends before they start using a shorter period of data points to analyze. Lagging indicators signal after a trend has already begun and are used to determine and confirm a trend.

Most Popular Stock Market Indicators

You will need to know the most critical stock indicators to begin making informed predictions about a market.

Market Breadth

Market breadth indicators analyze the relative trend of the overall market based on how many securities are on the rise versus how many are falling. If more stocks/securities have an upward trajectory, then the overall market breadth is positive, and we can say that the market is on a bullish run. If the majority of stocks/securities are declining, then the market breadth is negative and bearish.

The Advance-Decline line is one of the leading stock market indicators for market breadth. If only a few dominant securities are advancing, but most smaller securities are declining, the market breadth is still negative overall. This allows traders to see if only a few securities prop up the entire index or if the overall market sentiment and performance are genuinely positive.

Market Sentiment

These stock indicators are meant to help analysts determine the overall mood of the market. In its simplest form, these indicators help to determine if the overall market sentiment is likely optimistic (bullish) or pessimistic (bearish). This helps to indicate if the market is likely to continue on an upwards or downwards trend or whether any reversals are imminent.

Price and volume are two fundamental market sentiment indicators. A lot of trading volume (positive or negative) shows how strongly the market is behind a given trend.

The CBOE Volatility Index (VIX) indicator is often seen as the ‘fear index’ because it spikes when investors purchase a significant amount of put options—signaling the belief that the underlying stock will fall.

Advance-Decline

The Advance-decline (A/D) indicator is commonly used to determine the market breadth. It’s a simple indicator that plots the advancing stocks against the number of declining stocks. The indicator is cumulative, with a positive number added to the prior number, or if the number is negative, it’s subtracted from the prior number.

If major securities/indices rally while the A/D line is rising, it offers analysts stock signals that the market is strongly rebounding. But if significant securities/indices are rising, and the A/D line is flat or declining, it shows that the market might be near the end of its rally.

Moving Averages

Moving average is a technical indicator that indicates the average price for a particular trading instrument over a specified period. For example, you can have a 10-day, 50-day, or 200-day moving average that shows the change in the stock’s average closing price based on these timeframes.

Investors use moving averages to smooth out normal day-to-day price fluctuations and help track trends. There are two main types of moving averages:

  • Simple Moving Average (SMA)

This is the moving average described above. You add up the average prices of the financial instrument and then divide by the number of prices added together.

  • Exponential Moving Average (EMA)

An EMA applies more weight to the most recent closing prices to favor newer information. First, you need to calculate the SMA, then the multiplier for weighting the EMA over the given period, and then use this smoothing factor combined with the previous EMA to get the result.

Relative Strength Index (RSI)

The Relative Strength Index is a momentum stock market indicator used to measure the magnitude of recent price changes to evaluate if the price of a stock or a financial instrument indicates that it is overbought/oversold.

An RSI indicator uses a scale from 0 – 100. Oversold thresholds are closer to 0, while overbought thresholds are closer to 1. The indicator itself oscillates between these two extremes. So, RSI helps determine potential price swings or pullbacks.

For example, 70% is the typical overbought threshold for a stock, while 30% is the oversold threshold. When the indicator goes above 70%, it shows that the stock is experiencing more significant than average buying volumes and that a correction might be on the horizon.

Moving Average Convergence Divergence (MACD)

MACD is a trend-following momentum stocks indicator that shows the relationship between two moving averages of a security’s price. The standard formula for the MACD is to simply subtract the 26-period EMA (also called ‘signal line’) from the 12-period EMA.

When used as an indicator, two lines are plotted together—one for the 12-period EMA and one for the 26-period EMA. Traders usually look for points where the two lines cross to signal an upwards or downwards trend. For example, if the 12-period EMA crosses above the 26-period EMA, it’s a positive trend, while it’s negative if the 12-period EMA crosses below the 26-period EMA.

A 9-day EMA line is also often plotted with the MACD line to trigger stock buy sell signals. MACD is also often used with RSI or a histogram that graphs the distance between the MACD and its signal line.

The On-Balance Volume (OBV)

This momentum-based indicator uses volume flow to predict possible changes in the market price. When volume sharply increases without a movement in price, it’s a sign the price will soon rise or fall sharply. It uses the concept of representing increasing volume as pressure or tension building to the point of breaking.

OBV is cumulative based on the total positive or negative volume. How you calculate it depends on the relation between the current and previous OBV price:

  • If the current OBV is greater than the previous OBV, then you add the two together.
  • If the current closing price is lower than the previous, then you subtract the current OBV from the previous one.
  • If the current and previous OBVs are the same, then it remains unchanged.

NOTE: Robo advisors are a class of financial advisers that provide financial advice or online investments management with almost no human intervention. Instead, they provide advice based on mathematical rules or algorithms based on stock trading indicators. Some of the top Robo advisors can provide remarkable portfolio management capabilities.

Key Takeaways

Stock market indicators can be divided between trend, momentum, volatility, and volume indicators. These can further be divided into leading or lagging indicators.
Market breadth, sentiment, and other indicators are umbrella terms for a range of specific indicators that can give varying insights into the data.
Indicators are usually not used in isolation but in combination to give an overview of both the direction and momentum of market trends.
While investors and traders commonly use stock indicators, they cannot provide guaranteed predictions and are subject to unexpected news or market conditions.

Benefits of Stock Market Indicators

While market indicators aren’t a bulletproof way to succeed as an investor or trader, they certainly help understand the trends that drive market movements. Moreover, there are several advantages in learning to use indicators, especially for new investors.

  • Indicators indicate if a market is moving up or down and the relevant strength or momentum of these movements.
  • Upward or downward trending indices can be misleading on their own. Indicators can help pierce through the facade to see if these movements are sustained by underlying conditions, such as volume, A/D indicators, etc.
  • Indicators—particularly momentum-based ones—can help identify points where the market is likely to reverse or correct. These are critical points where everything can be won or lost.
  • Trend lines or moving averages can help smooth out the often jarring fluctuations of day-to-day changes in closing prices. This gives you a clearer long-term view of a financial instrument’s movements.
  • Technical indicators for stocks can be used in combination to make even more informed and accurate predictions. For example, trend indicators are often used to provide directional context to momentum indicators to determine the direction and strength.

NOTE: Indicators can be used to help predict the emerging trends of an overall market or index. For example, you may use indicators to decide which specific TaaS stocks you should buy. But if you can find an index with several TaaS stocks, you can use market-based indicators to bet on the entire TaaS market that consists of multiple securities.

Conclusion

If you wish to get involved in the stock market as an investor or trader, learning about stock market indicators is one of the best ways to start. Not only will understanding these indicators help you understand how the market moves and how trends are shaped, but it will also help you begin making informed trading decisions about how you invest your money. It may seem intimidating at first, but it just takes time to study and practice.

FAQ

What do stock market indicators measure?

Indicators measure many different factors that influence how markets move. They usually rely on past data to determine specific data points that can be used to make predictions on future movements or trends. Indicators help form conclusions based on a financial instrument’s trends, momentum, volume, and volatility.

How to watch the stock market?

You can google a specific index or stock, such as the S&P 500 or Tesla, Inc., to see its stock price. Another way is to create a free account with a trading platform or broker, which will provide you with market charts and indicators.

Is the stock market a good indicator of the economy?

Yes, if talking about the short to medium term. But it depends on whether earnings estimates are accurate or inflated/inaccurate. Stock market indicators can help determine an upward or downward economy because they can indicate if economic activity is up or down.

Sources

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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