Learn more about technical analysis of different indicators applied to the S&P 500, NASDAQ 100 and DJI to create index trading systems for options trading.
In general all technical studies could be divided into four categories: a) price based; b) volume based; c) breadth indicators; d) combined studies.
Price Based
Price based studies are the most popular due to simplicity of implementation in technical analysis. Majority of the price based indicators are calculated on the Price MA (Moving Averages). The example of price indicators could be "Price Moving Average", "MACD", "Relative Strength Index", "Stochastics", RSI and others.
Volume Based
The price movement is always characterized by change in price and by traded volume. In similar way (as with price based indicators) the main part of the volume studies are build from the VMA (Volume Moving Averages)."Volume Oscillator", "Percentage Volume Oscillator" (PVO) could be examples of such studies. The volume technical analysis is more complicated in comparison to the price technical analysis and it could be wrong to base a trading decision solely on volume analysis. It is recommended to monitor on the Price Moving Average at least, during the volume analysis.
Breadth Indicators
Category of Breadth technical studies includes Advance/Decline indicators and considered as very precise predictive tools in analysis of the indexes and exchanges. The Breadth (often called "Sentiment") studies are based on to the basket of stocks and cannot be applied to an individual stock. Majority of these studies are based on the number of declining and advancing stocks as well as on the advancing and declining volume, yet they could be based on new highs or new lows. "Advance/Decline Line", "TRIN", "New Highs/Lows oscillator" are examples of the Breadth indicators.
Volume/Price Based Technical Studies (combined indicators).
The last group of the technical studies uses volume and price based indicators, parameters to build a final indicator that reflects both price movement and volume activity. As an example "On Balance Volume" (OBV), "Money Flow Index" (MFI) formulas use price and volume parameters in the calculation and are used to indicate negative and positive (in and out) money flow in an analyzed security or stock market if these indicators are applied to indexes and exchanges.
Summary:
It is important to select the right set of technical studies from the big number of available studies to successfully use them in stock, futures and options trading. For each trader, trading style this set could be different. It is important to remember that many of indicators repeat each other with difference only in the presentation. The best choice could be those that you are most familiar with, fill comfortable to use and have practice in using. Yet, in order to see the complete picture it is recommended to have at least one indicator from each group: price based, volume based, Breadth group.
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