With a number of indicators on the IQ Option platform growing by day, it may be not as easy to choose an indicator that suits your personal trading style and preferences. More than 100 indicators can be found in the respective menu of the trade room. But how do you choose the best one? Today we are taking a closer look at all the major indicator categories and provide you with a brief overview of features that an aspiring technical analyst has to know.
All technical analysis indicators, found on the IQ Option platform, fall into one of the six major categories with its distinct characteristics and use: momentum, trend, volatility, moving averages, volume or other.
Momentum indicators, as the names implies, track market momentum. In other words, they help estimate the strength of a positive or negative price movement. The faster the change, the stronger the momentum. But why would you want to know it? In trading, the trend strength can be as important as the trend direction. The stronger the trend, the more trading opportunities it can offer. Stop-loss and take-profit levels will also be set differently for a slow-moving market and a highly volatile one. Popular momentum indicators include: Aroon Oscillator, Awesome Oscillator, Balance of Power, Detrended Price Oscillator, and Stochastic Oscillator.
Trend indicators help you determine the trend direction. Some may say that the trend direction is self-explanatory and do not require any additional tools to be detected. However, sometimes it is beneficial to look at certain aspects of the trend separately. More than that, certain tools in this category can offer you a new perspective on the existing trend and provide you with a better / more in-depth understanding of the underlying market processes.
Popular trend indicators include: Average Directional Movement Index, Bollinger Bands %B, CCI, Ichimoku Cloud, McGinley Dynamic, and Parabolic SAR.
Volatility indicators, as the name implies, measure volatility of a particular asset. It can be said that the higher the volatility, the higher the financial risk associated with the asset, but also the potential payout. Volatility indicators, therefore, help determine periods of rapid and slow price changes. When the market is flat and the price stays the same, volatility is low and trading opportunities are limited. When the price starts to fluctuate, market volatility goes up. Prominent indicators from this category include ATR, Bollinger Bands, and Donchian Channels.
Moving Averages are a separate group of indicators that all work in a very similar fashion. In a nutshell, they smooth out the trend line, reducing the price noise and making the underlying trend stand out more. They can be especially helpful when the market is uncertain of the future trend direction. Also, when a trend reversal point needs to be determined. Two and more moving averages can form a trading system of their own.
Unlike all other indicators, Volume indicators are not based on the price action. Instead, they are using a different set of data, namely the trading volume. The latter can be of great help when trying to time the deal. Growing / declining trading volume can be an indication of an upcoming trend reversal. It is, therefore, popular as a complementary tool. The number of this indicators are limited, with each of them working quite differently.
‘Other’ indicators encompass all other indicators (mostly unique ones) that do not fall into one of the above-mentioned categories. Though peculiar, most of them can become a valuable addition to your trading arsenal if applied correctly.
How many indicators should you be using for a single trading system? The answer will vary on whom you ask. However, the general rule is to use not more than three. While three is the maximum, it is also possible to trade with only two or even one indicator. Note that when trading with only one indicator it could be wise to double-check signals it sends on different timeframes or turn to fundamental data.
When you know what kind of assets you want to trade and how, you can compile your own trading system using the information above. If, for example, you want to trade highly volatile markets and open the deal at the moment of a trend reversal, you should consider using volatility and trend indicators.
A lot of traders recommend using indicators from different groups.
Indeed, what’s the point of using two different indicators from the same category? They may present information in a new light or provide an interesting insight, but in most cases, you may want indicators from different categories complementing each other.
Now, when you know how to develop a trading system of your own and combine indicators properly, you can continue to the trading platform and try them out, learning even more in the process. Practice makes perfect, and trading is not an exception.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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