Trading indicators: what they show and how to combine them
An indicator is a formula over price and volume that shows the trend, the strength of a move or an overbought condition. The most common are the 50- and 200-day moving averages, RSI, MACD, Bollinger Bands and volume. An indicator does not predict the price; it confirms what the chart already shows, so decisions rest on two or three signals, not one.
The average closing price over N days. They show the trend: price above the 50- and 200-day means an uptrend.
The relative strength index runs from 0 to 100: how much stronger the gains of the last 14 days were than the losses. Above 70 is called overbought, below 30 oversold, but in a strong trend RSI can stay above 70 for weeks.
The difference between two exponential averages (12 and 26 days) and its signal line (9 days). A crossover of the lines shows a change in momentum.
A 20-day average with two lines two standard deviations away. Narrowing bands mean a lull, often followed by a strong move.
How many shares changed hands in a day. A breakout on above-average volume is more reliable than one on a quiet market.
- Of the 2093 most traded US stocks, 1020 (49%) are above their 200-day average
- In the ideal order «price > 50 > 150 > 200»: 395
FAQ
Which indicator is best?
There is no best one. Start with moving averages and volume: they stay closest to the price itself.
Do indicators work on currencies and crypto?
The formulas are the same, but each market has its own hours, volumes and participants, so thresholds have to be checked again.
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