3 Volatility Indicators To Help You Trade Effectively
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Traders who subscribe to technical analysis operate under the fundamental theory that prices move in patterns and that price never lies. To the inexperienced eye, a stock chart may look like an unpredictable line with a jumble of colors and marks. But these traders are watching charts to pick up on the subtlest of indicators of where share prices could be headed next. Identifying trends over different time frames are useful because it can help weed out all the noise of daily volatility.
Trend traders use a number of different indicators to help them figure out what kind of trend a stock is in. The day moving average and day moving average are the two most commonly cited. Volume, of course, is the measure of the total number of shares that trade in a given time period. Where volume really comes in handy is for confirmation. Many traders use volume to confirm the conclusions from another type of indicator, such as a trend.
However, these moves often occur on relatively low volume and can be short-lived. Momentum indicators are like speedometers for traders; they show how fast a stock is moving in a given direction. These indicators are typically displayed as oscillators, which fluctuate above and below a baseline level to indicate how much positive buying or negative selling momentum a stock is experiencing.
Most RSI charts have lines at the 30 and 70 mark. If the stock moves below 30, that is a signal that the stock is oversold, and buyers could soon come in and drive the price higher. When a stock makes large moves in a short period of time, it is considered to be volatile. Volatility is a very important indicator for traders because volatility makes it easier to profit due to price inefficiencies.
Without volatility trading opportunities would be limited. In addition to the VIX, traders use volatility metrics such as average true range, Bollinger Bands, and envelopes as trading indicators. This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy.
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