Markets
12 Types of Technical Indicators Used by Stock Traders
If you’re planning to hold a portfolio of blue chip stocks well into retirement, then short-term movements in the market are not likely your biggest worry.
However, if you dabble in the stock market on a day-to-day basis, or if you simply want to know what drives the thinking of other market participants, it can be very beneficial to understand the basics of technical indicators.
Many traders swear by them to help with the timing of their trades or to alert them of trends. But, even for an investor more focused on the underlying fundamentals of companies, learning how these indicators work can provide added conviction on new or existing trades.
Types of Technical Indicators
Today’s infographic comes to us from StocksToTrade.com, and it explores the fundamentals behind 12 of the most commonly-used technical indicators. It differentiates between lagging and leading indicators, and also explains some basic tactics for incorporating these markers into an overall investment strategy.
The infographic differentiates between four different types, including trend, momentum, volatility, and volume indicators.
Trend indicators
These technical indicators measure the direction and strength of a trend by comparing prices to an established baseline.
Moving Averages: Used to identify trends and reversals, as well as to set up support and resistance levels.
Parabolic Stop and Reverse (Parabolic SAR): Used to find potential reversals in the market price direction.
Moving Average Convergence Divergence (MACD): Used to reveal changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
Momentum indicators
These technical indicators may identify the speed of price movement by comparing the current closing price to previous closes.
Stochastic Oscillator: Used to predict price turning points by comparing the closing price to its price range.
Commodity Channel Index (CCI): An oscillator that helps identify price reversals, price extremes, and trend strength.
Relative Strength Index (RSI): Measures recent trading strength, velocity of change in the trend, and magnitude of the move.
Volatility Indicators
These technical indicators measure the rate of price movement, regardless of direction.
Bollinger bands: Measures the “highness” or “lowness” of price, relative to previous trades.
Average True Range: Shows the degree of price volatility.
Standard Deviation: Used to measure expected risk and to determine the significance of certain price movements.
Volume Indicators
These technical indicators measure the strength of a trend based on volume of shares traded.
Chaikin Oscillator: Monitors the flow of money in and out of the market, which can help determine tops and bottoms.
On-Balance Volume (OBV): Attempts to measure level of accumulation or distribution, by comparing volume to price.
Volume Rate of Change: Highlights increases in volume. These normally happen mostly at market tops, bottoms, or breakouts.
Markets
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Small- and mid-cap stocks have historically outperformed large caps. What are the opportunities and risks to consider?
Beyond Big Names: The Case for Small- and Mid-Cap Stocks
Over the last 35 years, small- and mid-cap stocks have outperformed large caps, making them an attractive choice for investors.
According to data from Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned +1,664% versus +2,062% for small caps and +3,176% for mid caps. Â
This graphic, sponsored by New York Life Investments, explores their return potential along with the risks to consider.
Higher Historical Returns
If you made a $100 investment in baskets of small-, mid-, and large-cap stocks in February 1989, what would each grouping be worth today?
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Starting value (February 1989) | $100 | $100 | $100 |
Ending value (February 2024) | $2,162 | $3,276 | $1,764 |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Mid caps delivered the strongest performance since 1989, generating 86% more than large caps.
This superior historical track record is likely the result of the unique position mid-cap companies find themselves in. Mid-cap firms have generally successfully navigated early stage growth and are typically well-funded relative to small caps. And yet they are more dynamic and nimble than large-cap companies, allowing them to respond quicker to the market cycle.
Small caps also outperformed over this timeframe. They earned 23% more than large caps.Â
Higher Volatility
However, higher historical returns of small- and mid-cap stocks came with increased risk. They both endured greater volatility than large caps.Â
Small Caps | Mid Caps | Large Caps | |
---|---|---|---|
Total Volatility | 18.9% | 17.4% | 14.8% |
Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Small-cap companies are typically earlier in their life cycle and tend to have thinner financial cushions to withstand periods of loss relative to large caps. As a result, they are usually the most volatile group followed by mid caps. Large-cap companies, as more mature and established players, exhibit the most stability in their stock prices.
Investing in small caps and mid caps requires a higher risk tolerance to withstand their price swings. For investors with longer time horizons who are capable of enduring higher risk, current market pricing strengthens the case for stocks of smaller companies.
Attractive Valuations
Large-cap stocks have historically high valuations, with their forward price-to-earnings ratio (P/E ratio) trading above their 10-year average, according to analysis conducted by FactSet.
Conversely, the forward P/E ratios of small- and mid-cap stocks seem to be presenting a compelling entry point.Â
Small Caps/Large Caps | Mid Caps/Large Caps | |
---|---|---|
Relative Forward P/E Ratios | 0.71 | 0.75 |
Discount | 29% | 25% |
Source: Yardeni Research (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.
Looking at both groups’ relative forward P/E ratios (small-cap P/E ratio divided by large-cap P/E ratio, and mid-cap P/E ratio divided by large-cap P/E ratio), small and mid caps are trading at their steepest discounts versus large caps since the early 2000s.
Discovering Small- and Mid-Cap Stocks
Growth-oriented investors looking to add equity exposure could consider incorporating small and mid caps into their portfolios.
With superior historical returns and relatively attractive valuations, small- and mid-cap stocks present a compelling opportunity for investors capable of tolerating greater volatility.
Explore more insights from New York Life Investments
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