Technical Indicators Explained
Indicators are mathematical calculations applied to price and volume data. They don't predict the future — they help you read the present and assess probability.
What Indicators Actually Are
Every indicator is just maths applied to price data you can already see on the chart. They don't have a crystal ball — they repackage historical price action into a more digestible format.
Key Concept
Leading indicators try to signal moves before they happen (RSI, Stochastic). Lagging indicators confirm moves that have already started (Moving Averages, MACD). Use both types together — one to spot, one to confirm.
Moving Averages: SMA vs EMA
A moving average smooths out price data by averaging closing prices over a set number of periods.
- •SMA (Simple) — equal weight to all periods. The 50-day and 200-day SMA are the most watched in the world.
- •EMA (Exponential) — gives more weight to recent prices. Reacts faster to changes. The 9 and 21 EMA are popular for swing trading.
Golden/Death Cross
When the 50-day MA crosses above the 200-day MA, it's called a Golden Cross (bullish). When it crosses below, it's a Death Cross (bearish). These are widely followed signals.
RSI — Relative Strength Index
RSI oscillates between 0 and 100 and measures the speed and magnitude of recent price changes.
- •Above 70 — overbought. Price may be due for a pullback.
- •Below 30 — oversold. Price may be due for a bounce.
- •Divergence — when price makes a new high but RSI makes a lower high, it signals weakening momentum. One of the most powerful RSI signals.
Warning
In strong trends, RSI can stay overbought or oversold for extended periods. Don't blindly sell just because RSI hits 70 in a bull run — you'll get steamrolled.
MACD — Moving Average Convergence Divergence
MACD shows the relationship between two moving averages (typically the 12 and 26 EMA).
- •Signal line crossover — when the MACD line crosses above the signal line, it's bullish. Below is bearish.
- •Histogram — the bars show the distance between the MACD and signal line. Growing bars = increasing momentum.
- •Zero line — when MACD crosses above zero, the short-term trend is above the long-term trend.
Bollinger Bands
Bollinger Bands consist of a middle SMA (usually 20-period) with upper and lower bands set at 2 standard deviations.
The Squeeze
When the bands contract tightly, it means volatility is low and a big move is coming. You don't know which direction — but you know it's coming. This is called the Bollinger Squeeze.
Price touching the upper band doesn't mean "sell" — it means the asset is strong. Context matters.
The Golden Rule of Indicators
Warning
Use a maximum of 2-3 indicators. More than that and you'll get conflicting signals, analysis paralysis, and worse results. Price action + one trend indicator + one momentum indicator is all you need.
Risk Warning
Trading financial instruments carries a high level of risk and may not be suitable for all investors. You could lose some or all of your invested capital. Never trade with money you cannot afford to lose. This content is for educational purposes only and does not constitute financial advice.