Module 14: Technical Indicators
Key Takeaways
- Indicators are derived from price/volume — they confirm, not predict.
- RSI and MACD measure momentum; MAs measure trend.
- Bollinger Bands measure volatility; ATR measures range.
- Don’t stack too many — pick two or three that complement each other.
RSI (Relative Strength Index)
Formula: RSI = 100 − 100 / (1 + RS), where RS = average gain / average loss over 14 periods. Meaning: a momentum oscillator from 0–100. Signals: above 70 = overbought, below 30 = oversold; divergence between RSI and price warns of reversals. Example: price makes a higher high but RSI makes a lower high → bearish divergence.
MACD (Moving Average Convergence Divergence)
Formula: MACD = EMA(12) − EMA(26); signal line = EMA(9) of MACD. Meaning: trend + momentum. Signals: MACD crossing above its signal line is bullish; the histogram shows momentum strength. Example: a bullish crossover after a pullback can confirm a continuation.
Moving Average
Meaning: the average price over N periods, smoothing noise to reveal trend direction. Signals: price above a rising MA = uptrend; MA acts as dynamic support/resistance.
EMA (Exponential Moving Average)
Formula: weights recent prices more heavily: EMA = Price×k + EMA_prev×(1−k), k = 2/(N+1). Meaning: reacts faster than SMA. Signals: 50/200 EMA crossover (“golden”/“death” cross).
SMA (Simple Moving Average)
Formula: SMA = (P1 + P2 + ... + Pn) / n. Meaning: equal-weight average, smoother and slower than EMA. Signals: popular for the 200 SMA as a long-term trend filter.
Bollinger Bands
Formula: middle = 20 SMA; upper/lower = middle ± 2 standard deviations. Meaning: measures volatility. Signals: bands squeeze before big moves; price riding the upper band shows strength. Example: a squeeze followed by a breakout often precedes a strong trend.
Volume Indicator
Meaning: the number of units traded per period. Signals: rising volume confirms a move; a breakout on low volume is suspect. Volume is the fuel behind price.
VWAP (Volume Weighted Average Price)
Formula: VWAP = Σ(Price×Volume) / ΣVolume over the session. Meaning: the average price weighted by volume, a key intraday benchmark. Signals: price above VWAP = bullish intraday bias; institutions use it for fair value.
ATR (Average True Range)
Formula: average of the True Range (largest of high−low, |high−prev close|, |low−prev close|) over 14 periods. Meaning: measures volatility, not direction. Signals: size stops using ATR so they adapt to current volatility. Example: set a stop at 1.5× ATR below entry.
Combine one trend indicator (MA), one momentum indicator (RSI or MACD), and volume. Avoid “indicator soup” — too many signals cancel each other out.
Frequently Asked Questions
None alone. Indicators confirm price action and structure; they don’t replace them.
EMA for faster response (intraday), SMA for smoother long-term trend filters.