Advanced Technical Indicators
Technical indicators are mathematical calculations based on price and volume. They help traders identify trends, momentum, volatility, and potential entry/exit points. In this lesson, you'll master the most important indicators used by professional traders.
Types of Indicators
Indicators fall into several categories based on what they measure:
Using too many indicators leads to "analysis paralysis" and conflicting signals. Most successful traders use 2-4 indicators maximum, combining different types for confirmation rather than redundancy.
Moving Averages (MA)
Moving averages smooth out price data to show the trend direction. They're among the most widely used indicators in trading.
Simple Moving Average (SMA)
Calculates the average price over a set period. A 20-period SMA adds up the last 20 closing prices and divides by 20.
Exponential Moving Average (EMA)
Gives more weight to recent prices, making it more responsive to new information. Preferred by many traders for faster signals.
| Period | Use Case | Example |
|---|---|---|
| 9-12 EMA | Short-term trend, fast signals | Day trading |
| 20-21 EMA | Popular short-term average | Swing trading |
| 50 SMA/EMA | Medium-term trend | Position trading |
| 200 SMA | Long-term trend, major S/R | Bull/Bear market indicator |
Moving Average Crossovers
When a faster MA crosses a slower MA, it generates a signal:
- Golden Cross: Fast MA crosses ABOVE slow MA = Bullish signal
- Death Cross: Fast MA crosses BELOW slow MA = Bearish signal
Many traders use the 200 SMA as a bull/bear market divider. Price above the 200 MA = bullish environment (look for longs). Price below = bearish environment (consider shorts or staying out).
RSI (Relative Strength Index)
RSI measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions. It oscillates between 0 and 100.
RSI Interpretation
RSI Divergence
When price and RSI move in opposite directions, it signals potential reversal:
- Bullish Divergence: Price makes lower low, RSI makes higher low = Potential bounce
- Bearish Divergence: Price makes higher high, RSI makes lower high = Potential drop
In strong uptrends, RSI can stay overbought for extended periods. In strong downtrends, it can stay oversold. Don't fight the trend just because RSI shows extreme readings.
MACD (Moving Average Convergence Divergence)
MACD shows the relationship between two moving averages and helps identify trend changes and momentum.
MACD Components
- MACD Line: 12 EMA minus 26 EMA
- Signal Line: 9-period EMA of the MACD line
- Histogram: Difference between MACD and Signal line
MACD Signals
| Signal | Meaning | Action |
|---|---|---|
| MACD crosses above Signal | Bullish momentum | Consider long |
| MACD crosses below Signal | Bearish momentum | Consider short/exit |
| MACD crosses above zero | Trend turning bullish | Confirms uptrend |
| MACD crosses below zero | Trend turning bearish | Confirms downtrend |
| Histogram growing | Momentum increasing | Trend strengthening |
| Histogram shrinking | Momentum weakening | Watch for reversal |
Bollinger Bands
Bollinger Bands consist of three lines that expand and contract based on volatility. They help identify overbought/oversold conditions and volatility changes.
Components
- Middle Band: 20-period SMA
- Upper Band: Middle + (2 × standard deviation)
- Lower Band: Middle - (2 × standard deviation)
Using Bollinger Bands
Volume Indicators
Volume provides crucial context for price movements. These indicators help analyze volume patterns.
On-Balance Volume (OBV)
Cumulative indicator that adds volume on up days and subtracts on down days. Rising OBV suggests accumulation; falling OBV suggests distribution.
VWAP (Volume Weighted Average Price)
Shows the average price weighted by volume throughout the day. Institutional traders often use VWAP as a benchmark.
- Price above VWAP = bullish intraday bias
- Price below VWAP = bearish intraday bias
- VWAP often acts as support/resistance
Volume Profile
Shows volume traded at each price level over a period. High volume nodes (HVN) often act as support/resistance. Low volume nodes (LVN) are areas price tends to move through quickly.
Combining Indicators
The most effective approach is combining indicators from different categories to get confirmation without redundancy.
Trend: 200 EMA (direction)
Momentum: RSI (overbought/oversold)
Entry Timing: MACD crossover
Only go long when price is above 200 EMA, RSI is not overbought, and
MACD gives a bullish crossover.
Best Practices
- Use indicators as confirmation, not prediction
- Combine with price action and support/resistance
- Test your indicator combination before trading with real money
- Don't change indicators after each losing trade
- Simpler is often better - master a few indicators deeply
🧠 Test Your Knowledge
1. An RSI reading above 70 indicates:
2. A Golden Cross occurs when:
3. Bollinger Bands squeezing indicates:
📋 Lesson Summary
- Indicators fall into categories: trend, momentum, volatility, and volume
- Moving averages show trend direction; crossovers signal potential changes
- RSI measures momentum (0-100); above 70 = overbought, below 30 = oversold
- MACD shows momentum through moving average relationships and crossovers
- Bollinger Bands show volatility; squeezes often precede big moves
- Volume indicators like OBV and VWAP confirm price movements
- Combine 2-4 indicators from different categories for best results