Helpful trading indicators are a crucial element of your investing strategy. They allow you to see opportunities before everyone else and capitalize on undervalued stocks. Less popular indicators can also clue you into crucial buying and selling opportunities.
You might be wondering what the best strategies and indicators for optimal investment returns are? We highlight our favorite picks, why they are useful, and how you can build them into your investing game plan.
Relative Strength Index
Relative Strength Index (RSI) represents the stock price’s current strength compared to its historical prices. It is a powerful tool because it shows you buy and sell signals, verifies stock price movement, and communicates when the stock is oversold or overbought. RSI will help you expand your trading strategies because it informs you on the optimal entry and exit points of stock.
So, how do you read RSI and execute your trades effectively? The RSI will always have a value between 0 and 100, which indicates how overbought or oversold the stock is. A smart stock trader may make any one of these moves based on the RSI:
- Sell the stock when the RSI crosses below 70
- Buy the stock when both the stock price and Relative Strength Index increasing, and the RSI surpasses 50
- Sell the stock when both the stock price and Relative Strength Index are decreasing and the RSI falls below 50
Moving Average Convergence Divergence
The MACD (Moving Average Convergence Divergence) is another oscillating stock indicator. It continually fluctuates around zero and serves as an indicator for trends and momentum.
A fundamental MACD strategy is to analyze a histogram chart and see which side of zero the lines are sitting on. If the MACD lines are consistently above zero, then the stock is most likely upward. On the other hand, if the MACD lines are under zero for a long time, the stock’s trend is going down.
Therefore, if you see the MACD line cross from negative to positive, it is a buy signal. When MACD lines cross from positive to negative, it is a sign to sell the security.
You can also pay close attention to the MACD signal line crossovers for hidden signs to buy and sell. A MACD has a pair of lines: slow and fast. When the fast line crosses above and through the slow line, it is a buy signal. When the fast line crosses below and through, it is an excellent time to sell the stock.
The on-balance volume (OBV) consolidates all volume information about the stock into a single-line indicator. A stock’s OBV represents the cumulative selling and buying pressures. The OBV adds volume on the stock’s “up” days while decreasing it on the “down” days.
You can study the correlation between the OBV and price to determine buying and selling opportunities. If the OBV increases and the price remains stagnant, then the price will eventually follow, creating a buying opportunity. You can also tell when the stock is nearing a bottom. If the price decreases while the OBV is flat or rising, the price reaches its bottom for another buying opportunity.
Bollinger bands are helpful indicators that show the bandwidth for which a security is trading. When you analyze a stock’s Bollinger band, it gives you critical insights into its recent volatility and if the security is trading outside its normal levels. The narrower the bands are to each other, the lower the volatility. If the bands are wide, the perceived volatility is high.
Bollinger bands also assist in predicting long-term price fluctuations. When the price is consistently moving outside of its higher parameters, it is currently overbought, signaling a selling opportunity. When the price falls below the lower band, it might be oversold and offers a buying opportunity.
Other Useful Indicators
If you want to try other strategies apart from the four described above, check out these other less popular indicators for identifying prime opportunities: