When to Use Ranging Indicators and Trend Indicators in Stocks

by Sue-Lynn Carty, studioD

Analysts and investors use a range indicator when they are looking for signals that a current stock price trend is about to end or a new price trend is about to begin. A trend indicator is used to confirm whether a stock trend exists, and if it does, the indicator signals the direction in which the trend is moving.

Range Indicators

Range indicators compare high and low intraday stock prices with the high and low stock prices at market close from one period to another, or "close to close." The intraday stock prices are the short-term price fluctuations of a given stock within the trading day. Close-to-close stock prices for range indicators are the prices at market closing for specific periods you choose. For instance, you can compare the closing prices on a particular stock from one week to the next.

Range Indicator Purpose

Technical analysts utilize range indicators to determine the price support and resistance levels of a stock. Knowing these levels helps investors predict when a current trend is likely to end, signaling that a new trend will soon begin. When a stock hits its support level price, it has resistance to falling below that price. This occurs because the support level price is low, which induces new buyers to purchase the stock, causing the stock price to rise above the support level. When a stock hits its resistance level price, it has a difficult time rising above that ceiling. This occurs because the resistance price is high, inducing buyers to sell, which causes the stock price to drop.

Trend Indicators

When analysts use trend indicators, they look up a stock's historic price data and plot this information on a bar chart to verify the existence of a trend. Once a trend is identified, the strength or weakness of a trend is determined by plotting the moving average of a stock price on a bar chart. A stock's moving average is its average price over a given time, such as 90 days. Since trend indicators use historic price information, analysts refer to them as lagging indicators.

Trend Indicator Purpose

Technical analysts use trend indicators to determine whether a stock is on an upward or downward trend. They also use trend indicators to determine the strength of the trend. If a stock's moving averages are increasing, it is on an upward price trend; if the moving averages are decreasing, the stock is on a downward price trend. Analysts define a stock's support and resistance level when performing a trend indicator analysis to help determine whether the stock is on a strong upward trend or a strong downward trend. In the former case, the investor typically regards it as a buy signal; if it is on a strong downward trend, it is sends a sell signal.

About the Author

Sue-Lynn Carty has over five years experience as both a freelance writer and editor, and her work has appeared on the websites Work.com and LoveToKnow. Carty holds a Bachelor of Arts degree in business administration, with an emphasis on financial management, from Davenport University.

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