Top 8 Technical Analysis Tools for Stock Market

The stock market can be both exciting as well as scary for traders and investors. While it offers high potential to make profits, with that, there also come big risks. That’s why having the right tools to understand and analyze the stock market is essential. 

Such technical analysis tools for stock market help you understand the market better while improving your trading skills, making your trades smarter and more profitable. 

So, in this guide, let’s explore some of the top technical analysis tools for trading.

Top Technical Analysis Tools for Stock Market India

1. The Average Directional Index (ADX)

The Average Directional Index (ADX)

Source: strike.money

The Average Directional Index (ADX) is one of the special technical analysis tools for trading that helps us know how strong and powerful a trend is in the stock market. It’s like a guide for traders to decide if they should follow the trend, which can be safer and more profitable.

It’s used to assess when the price is trending strongly, and its calculations are based on the moving average of the change in price range over time. The default setting looks at 14 bars or time periods.

The resulting values are essential to differentiate the trending and non-trending conditions. When the ADX value is above 25, it means the trend is pretty strong, and traders might use trend trading strategies. But if the ADX is below 25, it says the trend isn’t very strong, and it might be better to avoid strategies that follow the trend.

2. Moving Average Convergence Divergence (MACD) Indicator

 Moving Average Convergence Divergence (MACD) Indicator

Source: strike.money

The Moving Average Convergence Divergence (MACD) is one of the best technical analysis tools for stock market that follows trends and momentum in the stock market. It shows a relationship between the two moving stock price averages.

First, it calculates moving averages of the stock’s closing prices over different periods, 12-period and 26-period. Then, it subtracts the 26-period from the 12-period moving average to make the fast MACD line. Next, it calculates another 9-period exponential moving average of this fast line to make the slow or signal MACD line.

Now, what it tells traders is – 

  • If the MACD line falls below the signal line, it’s a bearish signal
  • If the MACD rises above the signal line, it indicates a bullish signal.

It’s usually highly reliable when these lines cross each other and agree with the current trend. For example, if the MACD crosses above the signal line after a small dip, it’s a bullish signal, a good sign that things might get better in the market.

3. Aroon

Aroon

Source: strike.money

Aroon is a tool traders use to determine where the market is going. It helps them identify trends and potential trend reversals in the stock market. The tool has two indicators, Aroon up and Aroon down. The Aroon up measures how strong an uptrend is, and the Aroon down measures how strong a downtrend is.

Traders can use these 2 indicators and other tools to decide when to enter or exit a trade. 

  • To calculate Aroon Up, use the formula – Aroon Up = ((N – Days Since N-day High) / N) x 100. 
  • For Aroon Down, the formula is – Aroon Down = ((N – Days Since N-day Low) / N) x 100. 

‘N’ is the number of periods, and many traders use 14 as the default value.

The Aroon technical analysis tool interprets three things – 

  • When Aroon up crosses over Aroon down, it might mean a new uptrend is starting. 
  • On the other hand, if Aroon down crosses over Aroon up, it could signal the beginning of a downtrend. 

The values of the lines can also show how strong the trend is. Values closer to 100 mean a strong trend, while values closer to 0 suggest a weaker trend.

Traders can also use the Aroon tool to identify any trend reversals in the market, as the divergence between price movement and the Aroon indicator indicates the change in the market, confirming a trend reversal might be coming.

Read More: Fundamental Analysis and Technical Analysis | Detailed Comparison

4. The Stochastic Oscillator

The Stochastic Oscillator is another popular technical tool that helps trades analyze market trends to identify if stocks are in a good position to buy or sell. But, to manage trading positions effectively, considering the potential risks of oversold and overbought conditions is necessary.

When stocks get too popular, and everyone is buying (overbought), it might be smart to take your profits and not buy more because the prices might go down. On the other hand, when everyone is selling, and stocks are not so popular (oversold), it might be good to take your profits on selling and not sell more because prices might go up.

The tool analyzes today’s closing price compared to the highest and lowest prices over a certain time.

Using the calculation – 

%K= (today’s Close) – (Lowest low over a selected period) / (Highest over a selected period) – (Lowest low over a selected period) –

If the main line in the tool oscillates between 0 and 100, it indicates the level of the stock’s momentum. 

  • If the reading is over 80, it’s probably too popular (overbought), 
  • and if it’s under 20, it’s maybe not popular enough (oversold). 

The Stochastic Oscillator, interpreted by %K, helps traders make smarter stock choices.

5. Parabolic SAR

Parabolic SAR is one of the popular technical analysis tools for trading, which traders use to identify potential reversal points in the price of an asset. It does this by plotting some dots above or below the price of an investment, which indicates the change in trend. 

When the dots are close, it means the trend is strong, and when they’re far, the trend is weak. Traders use these dots along with other tools to ensure their trading signals are right and keep risks in check. 

6. The On-Balance Volume Indicator (OBV)

On-Balance Volume Indicator (OBV)

Source: strike.money

Traders use On-Balance-Volume (OBV) to monitor market volume flow. This tool works by calculating the total volume of an asset, adding volume on days when the price goes up, and subtracting the volume on days when the price goes down.

Here’s how it works.

Three rules are implemented as per the change in the closing price of an asset – 

  • If today’s price exceeds yesterday’s, the OBV goes up – Current OBV = Previous OBV + today’s volume.
  • If today’s price is lower than yesterday, the OBV goes down – Current OBV = Previous OBV – today’s volume.
  • If today’s price is the same as yesterday, the OBV stays the same – Current OBV = Previous OBV.

So, the OBC indicator is interpreted by analyzing changes in the OBC line, which represents the total volume of an asset. 

  • If the line goes up, investment magnitude increases, showing a positive or “bullish” feeling in the market. 
  • Conversely, if the line goes down, it means less asset volume, indicating a negative or “bearish” sentiment.

Traders can also watch for divergences, which means comparing the OBV line with the asset price. If there’s a difference between the OBV line and the price, it might be a sign of potential market reversals.

7. Simple Moving Averages (SMA)

The Simple Moving Average (SMA) is a well-known tool that traders use to figure out trends in the price of an asset. It looks at the average cost of an investment over a certain time, like 50, 100, or 200 days, and then shows that average on a chart. It makes it easier for traders to identify overall trends.

  • When the asset’s price is above the SMA line, it’s often seen as a positive or “bullish” sign. This suggests that the trend is going up. 
  • On the other hand, if the price is below the SMA line, it’s often seen as a negative or “bearish” sign, indicating that the trend is going down.

Traders can also pay attention when two SMAs cross each other on the chart. This crossing can be a signal to buy or sell. 

Read More: Difference Between Intraday and Delivery Trading

8. The Relative Strength Index (RSI)

 Relative Strength Index (RSI)

Source: strike.money

The Relative Strength Index (RSI) is like a speedometer for stocks. It’s a moment indicator that measures the magnitude of current price changes and determines if the stock is over or under-valued.

RSI can be calculated into two basic components – 

  • RSI Average Gain – This is the average of how much the price went up in the past 14 days.
  • RSI Average Loss – This is the average of how much the price went down in the past 14 days.

The calculation starts with the indicator finding average gain and loss for the first 14 days. 

  • First Average Gain = Sum of Gains over the past 14 periods / 14.
  • First Average Loss = Sum of Losses over the past 14 periods / 14

Next, it updates the averages using a formula for each new day.

  • Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.
  • Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

When RSI is above 70, it’s like saying the stock is too high (overbought), and when it’s below 30, it’s like saying the stock is too low (oversold). 

  • If the RSI goes from below 30 to above it, it’s a sign to consider buying. 
  • If it goes from above 70 to below it, it’s a sign to consider selling.

But remember, RSI needs to cross those lines in the right order. First, it should go past the oversold or overbought lines and cross back through them.

Final Verdict

So, these are some of the best stock market analysis tools India. For beginners, these top technical analysis tools for stock market are helpful to keep an eye on the market moments, trends, and more. But knowing these tools is not it. 

A better understanding of these technical analysis tools, knowing how they work, and applying knowledge via other strategies is essential. If you wish to learn how to use such tools and improve your trading as well as profit potential, explore courses offered by Upmarket Academy.

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