How to Choose Stock Analysis Tools: Understanding the 3 Categories of Indicators Every Trader Should Have

Why Learn About Indicators for Stock Trading

Creating success in the stock market isn’t based on a single formula. Some believe that finding companies with strong financial structures is a good choice, while others turn to technical analysis (Technical Analysis) to seize short-term profit opportunities. First and foremost, studying indicators (Indicators) is essential for those who want to stand out in the trading game.

What are indicators? By definition, they are processes that use price and trading volume data of stocks to perform calculations based on mathematical formulas, allowing us to see patterns more clearly, such as (Trend), price volatility (Volatility), and price momentum (Momentum). Traders use these tools because they help identify appropriate trading moments and increase the chances that their decisions will lead to profits.

How Many Types of Stock Indicators Are There?

Type 1: Trend Following Indicators (Trend Following Indicators)

This group helps us understand the current direction of stock price movements. Investors benefit clearly because they only need to study price changes over time. Examples of this type include MACD, Moving Average, and SAR. Generally, beginner traders won’t have much trouble using them because they only need to interpret the results.

Type 2: Momentum Indicators (Momentum Indicators)

This group is used to compare the difference between the current price and previous prices. The values range from 0 to 100 and signal whether a stock is overbought (Overbought) or oversold (Oversold). Common indicators in this category include RSI, CCI, and Stochastics.

Interpretation is quite straightforward: if momentum is below 100, it indicates a downward trend; conversely, if it is above 100, the price is rising.

Type 3: Volatility Indicators (Volatility Indicators)

This type of indicator helps us see how much the price is fluctuating. Many traders like to use these tools because wide price ranges offer good profit opportunities. Examples include ATR, Bollinger Bands, and Historical Volatility. Experts often choose to primarily use these indicators.

The True Benefits of Using Indicators

Help Beginner Traders Start Confidently

Investing based on fundamental company data may be safer for beginners, but if you want to speculate in the short term, correctly using indicators will significantly increase your chances of winning.

Create a Second Decision-Making Framework

Each tool has its own uniqueness, which can serve as a guide for investment. For newcomers to the stock market, these indicators help establish a clear and easy-to-follow decision system.

Elevate Trading Strategies

Indicators are not strategies by themselves but effective tools. When you learn how to combine multiple indicators, you’ll be able to seize profit opportunities in rapidly changing markets.

Choose the Most Suitable

If you’re a trader seeking long-term profits, focus on Trend Following Indicators like Moving Average. If you want to profit from short-term volatility, Volatility Indicators are a better choice.

The Risks to Watch Out for When Using Indicators

Dependence on Automated Trading Activities

The first downside is setting up automated trading systems. Many people lose money because they believe the tools will handle everything. Remember, during abnormal market conditions, human judgment remains an important factor.

No Guarantee of Accuracy

All technical analysis methods do not guarantee 100% prediction of the future. Indicators can give false signals, or sometimes you might sell too early because the signals change.

The Same Tools Can Yield Different Results

When using two indicators to analyze the same stock, you might get conflicting results. Even with the same data, different calculation formulas can produce different answers, causing confusion for traders.

Conflicting Signals from Multiple Indicators

If you combine several indicators, they may sometimes give opposite signals—one suggests buying, another suggests selling or holding—which can make decision-making uncertain.

Learn from Successful Traders

The truth about stock trading is that you don’t need to rely on all indicators. Many traders generate huge profits using other methods, such as fundamental news analysis, pattern recognition, or personal experience.

Summary

Indicators are useful tools for technical analysis, but they are not the only way to build wealth. After reading this article, you should understand how these powerful tools work and their advantages and disadvantages. This knowledge can help you decide which tools to use based on your trading style. Building a strong investment portfolio requires continuous learning and adapting strategies to changing market conditions.