Understanding market indicators

Stock market indicators are quite similar to technical indicators as they apply a formula to data points to draw a conclusion. Market indicators use data points from different securities, rather than a single security. Note that market indicators are created by doing an analysis of different companies, reaching new highs relative to those creating new lows.

Importance of stock market indicators

  • Helps formulate investing decisions
  • Based on stock market indicators, investors can formulate their investing decision. For instance, if the indicators indicate a bullish phase, one can step-up investments. On the other hand, if the indicators suggest a bearish phase, one can tune down investments, if required.

  • Reflects investors’ sentiments
  • Stock market indicators are a reflection of investors’ sentiments. If the mood is positive, indicators will be buoyant. On the other hand, a lag reflects a dampened mood. These sentiments can also help you get an idea of the economy to some extent.

Common stock market indicators

  • Trend Line
  • A trend indicator, the connection of three rising price bottoms signals an uptrend. On the other hand, three falling tops signal a downtrend. Price of stock above the uptrend line means bullish markets and the opposite means bearish market.

  • Relative Strength Indicator
  • A momentum oscillator, it measures the magnitude of directional price movement. Momentum refers to the rate of rise or fall. This indicator has three lines – upper line, lower line and a dashed mid-line. The upper line is generally at 70, the lower line is at 30 and the dashed mid-line is at 50 [1].

  • Rate of Change
  • A momentum indicator, this indicator is computed by a percentage change in prices of two selected time periods. A positive rate of change means a rise in prices, while a negative ROC indicates the opposite.

  • Moving Average Convergence Divergence (MACD)
  • It is a trend and momentum indicator, which is computed by the difference between 12 and 26-day moving averages. A rising MACD indicates an upward price trend and vice versa.
To sum up

While stock market indicators can help you gauge market sentiments, it’s essential to do your research too before investing. This is because stock markets are exposed to various systematic and unsystematic risks.

If you choose a fundamentally flawed stock, there even if the indicators suggest otherwise, you can suffer loses. Reading stock market indicators can be a little challenging. However, you can seek professional help and guidance from experts in deciphering them.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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