What is a Market Indicator?
A market indicator is a quantitative tool that is used by traders to interpret financial data in order to forecast stock market movements.
- A market indicator is a quantitative tool that is used by traders to interpret financial data in order to forecast stock market movements.
- Market indicators are considered a subset of technical indicators.
- Common examples of market indicators include market breadth, market sentiment, on balance volume, and moving averages.
Market Indicators vs. Technical Indicators
Market indicators are considered a subset of technical indicators, but the two share fundamental differences. Market indicators are calculated in the same way as technical indicators, which is by applying statistical formulas to a set of data points in order to derive ratios or formulas.
A market indicator can use data collated from multiple securities traded on a given market or part of an index. Technical indicators usually appear at the bottom of an index price chart, whereas market indicators are generally plotted on separate charts and graphs.
Market Indicators – Types
There are multiple types of market indicators. Common indicators include the following:
1. Market Breadth
Market breadth indicators compare data of several stocks that show a similar price movement. It enables traders to ascertain where the trend is headed in the near future. The number of companies that reach new highs will be compared with the number of stocks that reach new lows within a given trading period.
The market breadth is useful for trend traders who primarily seek to profit off betting on trends of price movements in the market. Trends are considered to be relatively no-risk if the indicators used are accurate, and risk is properly accounted for. However, trends do not account for trading psychology, which can cause unexpected price movements in the market.
For example, the advance-decline line is a ratio that considers the number of positively advancing stocks in an index as opposed to the stocks that are negatively advancing.
The indicator is useful as it incorporates the weight of the market capitalization of a given company while calculating the trajectory of price movements, as opposed to simply considering the price movements of the stock of the largest company in that index. Common examples include $NYAD and $NAAD.
2. Market Sentiment
Market sentiment indicators serve to contrast the price of a security with its volume of trade. It is done in order to determine if, on the overall market, investors are bullish or bearish on the overall market.
For example, the put-call ratio calculates the number of call options as opposed to the number of put options bought in a given duration.
3. Moving Averages
Moving averages are useful in filtering out irrelevant data points in that they “smooth” out available price data. It is because a moving average is expressed as a single flowing line that represents the average price of a given security over a period.
The chosen period is up to the discretion of the trader, depending upon their priorities. For example, investors and long-term trend followers will normally consider a timeframe of 50, 100, or 200 days. Short-term traders may consider a week-long period.
The moving average can indicate several properties in the trajectory of a given security. The angle of the slope can expose the trendline. A horizontal moving average shows that the price of the security varies while a positively sloped moving average shows that the price is likely to rise.
It is important to note that moving averages do not predict price movements, but simply show the real price movements that have already occurred. Examples include $NYA50, $NYA200, $NAA50, and $NAA200.
4. On-Balance Volume (OBV)
Volume of trade is an important market indicator, and on-balance volume collates a lot of volume-related data into a single flowing line. OBV doesn’t predict price movements but confirms trends. A rising OBV shows that the price of the security is rising while a negative OBV accompanies negative price movements.
If the OBV and price are moving in opposite directions, the price movement is likely to change its direction. A rising OBV accompanied by a falling price shows that the price may soon start to rise. A falling price accompanied by an OBV that is flatlining means that the price is nearing a bottom.
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