Top Technical Indicators for Rookie Traders (2024)

Starting out in the trading game? Looking for the best technical indicators to follow the action is important. It affects how you’ll interpret trends—both on positions and in the broad averages—as well as the type of opportunities that pop up in your nightly research. Here are some common technical indicators that can help you get started with trading.

Novice Trading Strategies

Most novices follow the herd when building their first trading screens, grabbing a stack of canned indicators and stuffing as many as possible under the price bars of their favorite securities. This "more is better"approach short circuits signal production because it looks at the market from too many angles at once. It’s ironic because indicators work best when they simplify the analysis—cutting through the noise and providing usable output on-trend, momentum, and timing.

Instead, you can take a different approach by breaking down the types of information you want to follow during the market day, week, or month.Nearly all technical indicators fit into five categories of research. Each category can be further subdivided into leading or lagging. Leading indicators attempt to predict where the price is headed while lagging indicators offer a historical report of background conditions that resulted in the current price being where it is.

• Trendindicators (lagging) analyze whether a market is moving up, down, or sideways over time.
• Mean reversionindicators (lagging) measure how far a price swing will stretch before a counter impulse triggers a retracement.
• Relative strengthindicators (leading) measure oscillations in buying and selling pressure.
• Momentumindicators (leading) evaluate the speed of price change over time.
• Volumeindicators (leading or lagging) tally up trades and quantify whether bulls or bear are in control.

So, how can a beginner choose the right settingat the startand avoid months of ineffective signal production?The best approach in most cases is to beginwith the most popular numbers—while adjusting one indicator at a time—and seeing if the output helps or hurts your performance. Using this method, you’ll quickly grasp the specific needs of your level.

Now that you understand the five ways that indicators dissect market action, let’s identify the best ones in each category for novice traders.

Trend Indicators

50-Day EMA and 200-Day EMA

We’ll start with two indicators that are embedded within the same panel as the daily, weekly, or intraday price bars. Moving averages look back at price action over specific time periods, subdividing the total to create a running average that’s updated with each new bar.The 50- and 200-day exponential movingaverages (EMAs) are more responsive versions of their better-known cousins, simple moving averages (SMAs). In a nutshell, the 50-day EMA is used to measure the average intermediate price of a security, while the 200-day EMA measures the average long term price.

In the example above, the 50- and 200-day EMAs rose steadily into the summer. The 50-day EMA turned lower in August, with the 200-day EMA following suit one month later. The shorter-term average then crossed over the longer-term average (indicated by the red circle), signifying a bearish change in trend that preceded a historic breakdown. Note that this example is the historical price action of a U.S. Oil fund.

Mean Reversion Indicators

Bollinger Bands

USO buying and selling impulses stretch into seemingly hidden levels that force counter waves or retracements to set into motion. Bollinger bands (20, 2) try to identify these turning points by measuring how far price can travel from a central tendency pivot—the 20-day SMA in this case—before triggering a reversionary impulse move back to the mean.

The bands also contract and expand in reaction to volatility fluctuations, showing observant traders when this hidden force is no longer an obstacle to rapid price movement.

Relative Strength Indicators

Stochastics

Market movement evolves through buy-and-sell cycles that can be identified through stochastics (14,7,3) and other relative strength indicators. These cycles often reach a peak atoverbought oroversold levels and then shift in the opposite direction, with the two indicator lines crossing over. Cycle alternations don’t automatically translate into higher or lower security prices as you might expect. Rather, bullish or bearish turns signify periods in which buyers or sellers are in control of the ticker tape. It still takes volume, momentum, and other market forces to generate price change.

In this example, SPDR S&P Trust (SPY) oscillates through a series of buy-and-sell cycles over a five-month period. Look forsignals where:

1. A crossover has occurred at or near an overbought or oversold level
2. Indicator lines then thrust toward the center of the panel.

This two-tiered confirmation is necessary because stochastics can oscillate near extreme levels for long periods in strongly trending markets. And, while 14,7,3 is a perfect setting for novice traders, consider experimenting to find the setting that best fits the instrument you are analyzing. For example, experienced traders switch to faster 5,3,3 inputs.

Momentum Indicators

MACD

Moving average convergence divergence (MACD) indicator, set at 12, 26, 9, gives novice traders a powerful tool to examine rapid price change. This classic momentum tool measures how fast a particular market is moving while it attempts to pinpoint natural turning points. Buy or sell signals go off when the histogram reaches a peak and reverses course to pierce through the zero line. The height or depth of the histogram, as well as the speed of change, all interact to generate a variety of useful market data.

SPY shows four notable MACD signals over a five-month period. The first signal flags waning momentum, while the second captures a directional thrust that unfolds right after the signal goes off. The third signal looks like a false reading but accurately predicts the end of the February–March buying impulse. The fourth triggers a whipsaw that’s evident when the histogram fails to penetrate the zero line.

Volume Indicators

On-Balance-Volume (OBV)

Keep volume histograms under your price bars to examine current levels of interest in a particular security or market. The slope of participation over time reveals new trends—often before price patterns complete breakouts or breakdowns. You can also place a 50-day average of volume across the indicator to see how the current session compares with historic activity.

Now add on-balance volume (OBV), an accumulation-distribution indicator, to complete your snapshot of transaction flow.The indicator adds up buying and selling activity, establishing whether bulls or bears are winning the battle for higher or lower prices.You can draw trendlines on OBV, as well as track the sequence of highs and lows. It works extremely well as a convergence-divergence tool. For example, between January and April, Bank of America (BAC) proved this when prices hit a higher high while OBV hit a lower high, signaling a bearish divergence preceding a steep decline.

Support and Resistance Levels

Support is a price level at which a security tends to stop falling and may even bounce back, symbolizing a concentration of buying interest. Conversely, resistance is a level at which a security often halts its upward momentum, indicating a concentration of selling interest. These levels are significant because they represent the collective actions of market participants.

As a beginning trader, it can be important to identify support and resistance through historical price data, where certain levels have consistently acted as turning points. The technical indicators discussed above can help strengthen the reliability of the levels you've identified.

There's also special considerations for beginners who may be looking for lower risk-reward trade-offs. Generally speaking, buying near a strong support level provides a favorable risk-reward ratio, as the expectation is for a bounce upward. On the flip side, selling or shorting near a strong resistance level allows traders to capitalize on the anticipated downturn. Keep both strategies in mind as you engage with the technical indicators discussed earlier.

Fibonacci Retracement

Fibonacci retracement is a powerful tool in the toolkit of any trader, especially for rookies wanting to understand market movements. Named after the famous Italian mathematician Leonardo Fibonacci, Fibonacci retracement is based on a sequence of numbers where each number is the sum of the two preceding ones.

In trading, Fibonacci retracement is used to identify potential support and resistance levels by plotting horizontal lines at key Fibonacci levels – typically 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels are considered significant because they often align with natural market retracement levels during price corrections within a broader trend.

For an uptrend, the tool is applied from the low to the high, while in a downtrend, it is applied from the high to the low. Once these levels are plotted, traders look for potential reversal points, where the price might experience a bounce or a slowdown in its current trend. Most importantly, the 50% level is not a Fibonacci number but is often included in the tool as a psychological level representing a halfway point in the retracement.

The Bottom Line

Choosing the right technical indicators is daunting but can be managed if novice tradersfocus the effects into five categories of market research: trend, mean reversion, relative strength, momentum, and volume.Once they’ve added effective indicators for each category, they can begin the long but satisfying process of tweaking inputs to match their trading styles and risk tolerance.