Technical Indicators
Technical indicators analyze price and volume patterns rather than company fundamentals. They're widely used for timing entries and exits, but work best alongside — not instead of — fundamental research.
Moving Averages — simple, exponential, golden/death cross
Simple moving average (SMA) = average closing price over the last n days. Exponential moving average (EMA) weights recent prices more heavily.
Smooths out price noise to reveal the underlying trend direction. A 'golden cross' (short-term average crossing above the long-term average) is read as bullish; a 'death cross' (crossing below) as bearish.
Strengths: Simple, intuitive, and usable across almost any time frame.
Watch out for: A lagging indicator based on past prices — it reacts slowly to sudden trend changes, and golden/death crosses generate frequent false signals in a sideways (range-bound) market.
Combine with: Trading volume and oscillators like RSI.
MACD
MACD line = Short-term EMA − Long-term EMA (commonly 12-day and 26-day). Signal line = n-day EMA of the MACD line (commonly 9-day).
Uses the gap between two moving averages to capture both trend direction and momentum.
Strengths: Combines trend-following and momentum characteristics, and is one of the most widely used indicators.
Watch out for: Prone to false signals in a range-bound, directionless market.
Combine with: RSI and the actual price trendline.
Relative Strength Index, RSI
RSI = 100 − [100 ÷ (1 + RS)], where RS = average gain over a period (commonly 14 days) ÷ average loss over that period.
A 0–100 reading of overbought/oversold conditions based on recent price momentum. Readings above 70 are often read as overbought, below 30 as oversold.
Strengths: Quantifies market 'heat' in a way that's intuitive to interpret.
Watch out for: Can stay pinned in overbought or oversold territory for extended periods during a strong trend, which is where more advanced concepts like divergence come in.
Combine with: Moving averages (to confirm the underlying trend direction) and MACD.
Stochastic Oscillator
%K = (Latest close − Lowest low over n days) ÷ (Highest high − Lowest low over n days) × 100. %D is a moving average of %K.
Shows where the current price sits within its recent trading range — used, like RSI, to gauge overbought/oversold conditions.
Strengths: Good at picking up short-term overbought/oversold extremes, often used for timing contrarian trades.
Watch out for: Generates frequent, noisy signals in volatile markets.
Combine with: RSI and a trend indicator (to confirm the broader trend direction first).
Bollinger Bands
Center line = n-day moving average. Upper/lower bands = center line ± (standard deviation × multiplier, commonly 2).
Visualizes price volatility, showing the statistically 'normal' range prices tend to stay within.
Strengths: The width of the bands gives an intuitive read on rising or falling volatility.
Watch out for: Touching a band doesn't automatically mean a reversal — in a strong trend, price can 'walk the band' for an extended stretch.
Combine with: RSI and trading volume.
Ichimoku Cloud
Built from several lines — conversion line, base line, two leading spans, and a lagging span — that together form the 'cloud.'
A Japan-originated, all-in-one indicator using the 'cloud' (support/resistance zone) to judge trend direction, strength, and turning points.
Strengths: Consolidates several time frames of information into a single chart, with visually intuitive support/resistance zones.
Watch out for: Has many components and takes real time to learn to interpret correctly.
Combine with: Moving averages and trading volume.
Volume & Volume-Weighted Average Price, VWAP
Volume = shares traded over a period. VWAP = cumulative (price × volume) ÷ cumulative volume.
Volume measures the 'conviction' behind a price move — a move on high volume is generally considered more meaningful than the same move on low volume. VWAP is also widely used as an institutional execution benchmark.
Strengths: Reveals participation and conviction that price alone doesn't show.
Watch out for: Volume alone doesn't indicate direction (buying pressure vs. selling pressure).
Combine with: Price trend and moving averages.
Advance-Decline Ratio
Total advancing issues ÷ Total declining issues over a period × 100
A market-wide sentiment gauge. Readings above roughly 120% are often read as overbought market-wide, below roughly 70% as oversold.
Strengths: Captures overall market sentiment rather than any single stock.
Watch out for: The 'normal' threshold levels shift over time and across markets, so they're not an absolute rule.
Combine with: The VIX index and the count of new highs/new lows.
Margin Buy/Sell Ratio
Outstanding margin buy balance ÷ Outstanding margin sell balance
A supply-demand indicator, common in the Japanese market, comparing outstanding leveraged long positions (future selling pressure) against short positions (future buy-back pressure).
Strengths: Offers a read on future supply/demand pressure and the potential for a short squeeze.
Watch out for: A low ratio (heavy short interest) can be read either as bearish sentiment or as fuel for a future squeeze — interpretation depends heavily on context.
Combine with: Trading volume and the price trend.
Psychological Line
Percentage of up days out of the last n days (commonly 12)
A simplified gauge of crowd psychology. Readings above roughly 75% are often read as overbought, below roughly 25% as oversold.
Strengths: Simple and intuitive to calculate.
Watch out for: Only counts up days vs. down days, ignoring the size of each move, so it can swing around even during a series of small price changes.
Combine with: RSI and the stochastic oscillator.
Average Directional Index, ADX
Smoothed from the absolute difference between +DI and −DI (directional indicators).
Measures the strength of a trend on a 0–100 scale, without indicating its direction. Readings above roughly 25 are often read as a strong trend.
Strengths: Helps judge in advance whether trend-following tools (like moving averages) are likely to work well in the current market.
Watch out for: Doesn't show direction (up or down) on its own — must be paired with +DI/−DI.
Combine with: +DI/−DI and moving averages.
Average True Range, ATR
n-day average of the 'true range' (accounting for the high, low, and prior close).
Measures the magnitude of price movement (volatility), not the price level itself.
Strengths: Directly useful for practical risk management, such as setting stop-loss distances.
Watch out for: Says nothing about direction, so it can't be used alone to make a buy/sell decision.
Combine with: Bollinger Bands and position-sizing decisions.
Fibonacci Retracement
Applies ratios derived from the Fibonacci sequence (23.6%, 38.2%, 50%, 61.8%, etc.) to the range of a recent price swing to identify potential turning points.
Based on the empirical observation that pullbacks after a directional move often stall near certain ratio levels.
Strengths: Offers concrete candidate price levels for support and resistance.
Watch out for: Not grounded in rigorous statistical evidence — it works partly because so many market participants watch the same levels, a self-fulfilling effect.
Combine with: Moving averages and trading volume.