Technical Indicators
Technical Analysis • Intermediate Level
Mastering technical indicators unlocks deeper insights into market trends, momentum shifts, and potential reversals. These mathematical tools transform raw price data into actionable signals for timing entries and exits in your trading strategy.
1Moving Averages
Moving averages smooth price data to reveal underlying trends and dynamic support/resistance zones.
Simple Moving Average (SMA)
Calculation:
Mean of closing prices over n periods
SMA = (P₁ + P₂ + ... + Pₙ) ÷ n
Use Case:
Identify trend direction; price above SMA signals uptrend, below signals downtrend
Exponential Moving Average (EMA)
Calculation:
More weight on recent prices via smoothing factor
α = 2 ÷ (n + 1)
Use Case:
Reacts faster to current price changes; preferred for short-term signals
| Feature | SMA | EMA |
|---|---|---|
| Responsiveness | Slower | Faster |
| Lag | Higher | Lower |
| Best For | Long-term trend analysis | Short-term entries/exits |
| Common Settings | 50-day, 200-day | 12-day, 26-day |
Moving Average Crossovers
Golden Cross (Bullish)
Short-term MA crosses above long-term MA → bullish signal for potential upward momentum
Death Cross (Bearish)
Short-term MA crosses below long-term MA → bearish signal for potential downward momentum
Pro Tip: Pair moving averages with volume confirmation to avoid false crossovers during sideways market conditions.
2Relative Strength Index (RSI)
RSI gauges the speed and change of price movements to identify overbought or oversold conditions.
Calculation
RSI = 100 - (100 ÷ (1 + RS))
where
RS = Average Gain ÷ Average Loss
Typically calculated over 14 periods, RSI oscillates between 0 and 100.
Interpretation
- • Above 70: Overbought (potential pullback)
- • Below 30: Oversold (potential rebound)
- • 50 Midpoint: Distinguishes bullish vs. bearish momentum
- • Divergence: Price and RSI moving in opposite directions
| RSI Zone | Signal |
|---|---|
| 70–100 | Overbought; look for short setups |
| 50–70 | Bullish momentum |
| 30–50 | Bearish momentum |
| 0–30 | Oversold; look for long setups |
RSI Divergence Patterns
Bullish Divergence
Price makes lower low, RSI makes higher low → possible reversal up
Bearish Divergence
Price makes higher high, RSI makes lower high → possible reversal down
3Moving Average Convergence Divergence (MACD)
MACD highlights shifts in momentum by comparing two EMAs and their divergence from a signal line.
Components
- MACD Line: 12-day EMA minus 26-day EMA
- Signal Line: 9-day EMA of MACD Line
- Histogram: MACD Line minus Signal Line
Key Signals
- MACD Crossover: Entry/exit timing signals
- Zero-Line Cross: Trend direction indication
- Histogram Peaks: Momentum strength measurement
| Element | Interpretation |
|---|---|
| MACD Crossover | Entry/exit signal confirmation |
| Zero-Line Cross | Trend direction (above = bullish, below = bearish) |
| Histogram Size | Strength of momentum (larger bars = stronger) |
MACD Trading Signals
Bullish Signals
- • MACD Line crosses above Signal Line
- • MACD Line crosses above zero line
- • Histogram bars grow larger above zero
Bearish Signals
- • MACD Line crosses below Signal Line
- • MACD Line crosses below zero line
- • Histogram bars grow larger below zero
4Bollinger Bands
Bollinger Bands measure volatility by enveloping a moving average with standard deviation bands.
Calculation
- Middle Band: 20-day SMA
- Upper Band: 20-day SMA + (2 × 20-day standard deviation)
- Lower Band: 20-day SMA − (2 × 20-day standard deviation)
Key Concepts
- Band Squeeze: Narrow bands signal low volatility
- Band Expansion: Wide bands indicate high volatility
- Price Touches: Band contact suggests reversal points
| Scenario | Signal |
|---|---|
| Band Squeeze | Watch for breakout direction - volatility expansion coming |
| Walk the Bands | Strong trend confirmation - price hugs upper/lower band |
| Reverse from Band | Potential short-term reversal - mean reversion opportunity |
Trading Applications
Volatility Breakouts
Combine Bollinger squeezes with volume spikes for high-conviction breakout trades
Mean Reversion
Use band touches as reversal signals in ranging markets with proper risk management
5Additional Key Indicators
Average True Range (ATR)
Measures volatility by averaging true price ranges over a specified period.
Use Case: Setting dynamic stop-loss levels based on market volatility
Stochastic Oscillator
Compares closing price to its range over n periods to identify momentum.
Signals: Above 80 = overbought, Below 20 = oversold
On-Balance Volume (OBV)
Cumulates volume based on price direction to confirm trend strength.
Signal: Rising OBV with rising prices confirms bullish trend
Average Directional Index (ADX)
Quantifies trend strength regardless of direction from 0 to 100.
Threshold: ADX > 25 indicates a strong trending market
📊Indicator Comparison & Applications
| Indicator | Type | Measures | Best Used For |
|---|---|---|---|
| SMA/EMA | Trend | Price smoothing | Identifying trend direction |
| RSI | Momentum | Speed of price change | Overbought/oversold signals |
| MACD | Momentum | EMA convergence/divergence | Entry/exit timing |
| Bollinger Bands | Volatility | Price dispersion | Breakout/mean reversion |
| ATR | Volatility | Average range | Stop-loss placement |
| Stochastic | Momentum | Price vs. range | Identifying turning points |
| OBV | Volume-based | Cumulative volume | Volume confirmation |
| ADX | Trend Strength | Trend magnitude | Trend strength assessment |
Best Practices & Guidelines
Essential Best Practices
- Combine trend and momentum indicators for confirmation
- Limit to 2–3 complementary indicators to avoid overload
- Validate signals across multiple timeframes
- Use dynamic stop-losses based on volatility (ATR)
Implementation Tips
- Backtest indicator settings on historical data before live use
- Consider market conditions - indicators work differently in trends vs. ranges
- Adjust timeframes - use MACD on daily for swing trades, weekly for long-term
- Remember: indicators are lagging - use for confirmation, not prediction