The technical indicator is intended to help you to improve the timing of your trades. It backs your analysis of share price trends, but is not a substitute. If indicators send out a message that contradicts the price charts, it is a warning sign.

The indicator is structured as a horizontal range on the lower part of a daily chart, and registers real-time price movement on a scale of perhaps 1–100. It is focused on price, volume or momentum. Let us look at each.

Price
Moving averages
Moving averages show changes in the average share price over a given period. They are a trend-following indicator, and so lag the share price, but can help to assess its likely future direction. Moving averages work best in a fast trend with minimum price fluctuation.

This indicator is so widely used that it is available through many free online services as well as almost any technical investment software. To understand in more detail what this indicator can do for you, it helps to know how it works, so let us delve into a little maths. Before you throw down this book in disgust, I promise you it will be very basic stuff.

To calculate a simple moving average, add up the closing prices included over the relevant number of days and divide the result by the number of prices. If you have 20 prices on the basis of one a day, you will create a 20-day moving average. This is highly sensitive because it is over a short time period, which makes it suitable for keeping track of a short-term investment. If you have a 200-day moving average, it is less volatile because the averages are smoothed over a longer period, which makes it suitable for keeping track of a long-term investment.

When the share price crosses from below to above the moving average, it could be leading the trend up and is a buy signal. The logic is that the shares have started outperforming the average of the recent given period. On the same basis, if the price crosses to below the moving average, this could be leading the trend down, and is a sell signal.

The golden cross arises when two moving averages cross over on your chart as they move upwards. It is a bullish indicator. The dead cross arises when they cross as they move downwards, and it is bearish. In either case, the indicator is more reliable if increasing trading volume backs it. The triple golden, or dead, cross involves three moving averages crossing (typically 5, 10 and 20 day), and is considered less effective.

All this is the theory and moving averages do not always stick to it, but they are another quiver to your bow. US trader Marty Schwartz has found that moving averages work better than any other investment timing tool at his disposal.

For the connoisseur, there are refinements. The weighted moving average gives proportionate extra weighting to more recent share prices. The exponential moving average does the same, but includes price data from outside the period of the moving average.

The moving average convergence divergence (MACD)
The moving average convergence/divergence indicator, known commonly as MACD, is a trend-following indicator that keeps you permanently in the market. The basic MACD line is formed from the difference between a 12-period and a 26-period exponential moving average of the closing price and is plotted as a solid line on the chart. The slow line, known as the signal line, is a nine-period exponential moving average of the MACD line and is plotted as a dotted line.

The MACD line and the signal line may swing either side of a zero line, and there are no overbought/oversold boundaries. Signals come late. If the MACD line crosses from beneath to above the signal line, it is the signal to take a long position. If it crosses from above to below a signal line, the signal is to take a short position.