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Indicators Guide

Trading indicators are mathematical calculations based on price and volume. Used correctly they enhance your analysis. Used incorrectly they create confusion. Learn each one properly.

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Moving Averages (MA)

Moving averages smooth price data to show the trend direction. They are the foundation of many trading systems.
MA Type Calculation Best Use Setting
SMA 200 Simple average of 200 closes Long-term trend direction Daily chart
EMA 50 Exponential, more weight on recent Medium-term trend H4, Daily
EMA 20 Fast EMA, follows price closely Short-term trend, dynamic S/R H1, H4
EMA 9 + 21 Crossover system Short-term entries M15, H1
Golden Cross 50 MA crosses above 200 MA Major bullish signal Daily, Weekly

Pro Tip: The 200 EMA on the Daily chart is watched by millions of traders. When price is above the 200 EMA, you should primarily look for BUY setups. Below the 200 EMA = look for SELL setups. This simple rule significantly improves your win rate.

RSI (Relative Strength Index)

RSI measures the speed and magnitude of price movements. It oscillates between 0 and 100.
  • Above 70 = overbought (but can stay overbought for a long time in strong trends)
  • Below 30 = oversold (can stay oversold in strong downtrends)
  • Best use: RSI DIVERGENCE — price makes new high but RSI makes a lower high = bearish divergence, potential reversal
  • RSI works best in RANGING markets. In strong trends, overbought/oversold readings are not reliable reversal signals.
  • RSI crossing 50 upward = bullish momentum shift. Crossing 50 downward = bearish.

MACD (Moving Average Convergence Divergence)

  • MACD = difference between 12 EMA and 26 EMA (fast line)
  • Signal Line = 9 EMA of MACD (slow line)
  • Histogram = MACD minus Signal Line
  • MACD Crossover: MACD crosses above signal = bullish. Below = bearish. (Many false signals in ranges)
  • MACD Divergence: most reliable use. Price makes new high, MACD makes lower high = bearish divergence.
  • Zero line cross: MACD crosses above zero = medium-term bullish bias

Bollinger Bands

  • Upper Band: 2 standard deviations above the 20 SMA
  • Lower Band: 2 standard deviations below the 20 SMA
  • Price touches upper band = price is statistically extended — potential pullback
  • Bollinger Squeeze: bands contract tightly = low volatility building energy for a breakout
  • After a squeeze, the breakout direction is the trading opportunity
  • Riding the bands: in a strong trend, price can walk along the upper or lower band for extended periods
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Key Takeaways

  • Indicators are lagging — price leads, indicators follow
  • Use max 2-3 indicators to avoid analysis paralysis
  • RSI overbought/oversold works best in ranges
  • MACD divergence is the most reliable MACD signal
  • Bollinger Bands squeeze predicts big moves
  • Moving averages are trend-following tools
  • Volume-based indicators are most reliable
  • Never trade indicator signals against the trend

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