What are Market Indicators?

A market indicator highlights a quantitative approach. The traders employ it to analyse financial data and predict fluctuations in the stock market. It can be considered as stats and numbers that reflect the gains and losses in stocks and indexes. In addition, these indicators also predict whether an index will reflect an upward or downward graph. These graphs are analysed over the short and long-term periods accordingly.

Why are Market Indicators essential?

Insights about market trends and potential investment opportunities get covered under this. Investors, traders, and analysts frequently utilise market indicators to make decisions. They take a call on whether to purchase, sell, or continue to hold on to assets.

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Market indicators apply a set of stats to a group of data points. They draw data from a variety of securities as opposed to just one. They do not reflect the above or below the index price chart. Instead, they have their own separate chart.

What are the types of Market Indicators?

1. Market Breadth

The number of stocks within the group participating in a trend is measured by breadth indicators. They are based on price information for the stocks in the group.

We consider these two parameters while evaluating the market breadth –

1. Advance-decline ratio – It is the number of advances (stocks with a price increase) compared to the number of declines (stocks with a price decrease) on a certain trading day. A market with broad participation and strength is indicated by a high advance-decline ratio. A market with a low ratio is seen to be more selective.

Example –Let’s take 50 equities of the Nifty 50 Index on any specific trading day. Out of 50 equities, 40 experience price increase (advancing stocks). The remaining 10 experiences price decrease (declining stocks). This suggests a strong market and broad participation, indicating a positive market breadth.

2. Up volume-down volume ratio – Another indication of market breadth is the up volume-down volume ratio. The stocks’ overall trading volume having a price increase is compared with those witnessing a decrease. Here, a ratio below 1 denotes greater selling demand and a negative market breadth. A ratio above 1 denotes increased buying demand and positive market breadth.

Example – On a certain day, the trading volume of stocks sees a price increase of 200 crore shares. The trading volume of stocks experiencing a price decrease is 150 crore shares. The up-volume-down volume ratio would be 200/150, or roughly 1.3. This indicates a favourable market breadth.

  2) Market Sentiment

Investor sentiment is also known as sentiment indicators. It is used to gauge whether investors are positive or negative about the market. Market Sentiment relies on an analysis of the investors themselves and not on the price and volume parameters. The other factor considered is the amount of capital being invested.

Example – Market sentiment became extremely negative during the global pandemic. Investors anticipated that businesses and economies may be disrupted. This would lead to a widespread sell-off in stocks. The investor's confidence increased with the news of vaccines and government action measures. This caused a shift to a positive attitude and a positive market sentiment.

Conclusion

In addition to these common market indicators, one can opt for other options too. These include - Stock Market Indicators (BSE Sensex and NSE Nifty). You can even go for sector-specific indicators like Bank Nifty (Banking sector) or Nifty IT Index (IT sector). Using these, you can assess the performance and the trends of the financial markets.

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