⭐ Technical Indicators: A Complete Explained Summary


1. What Are Indicators?

Indicators are mathematical calculations derived from price, sometimes also from volume. Traders like indicators because:

  1. They give quantitative, number-based signals.
  2. They are very easy to plot—charting platforms calculate them automatically.

Indicators help you understand things like:

  1. Overbought / Oversold zones
  2. Momentum strength
  3. Trend direction
  4. Distance from average price

There are two kinds of indicators:

A. Overlay Indicators (plotted on price chart)

  • Moving Averages
  • Bollinger Bands

B. Underlay Indicators (plotted in a separate panel)

  • RSI
  • MACD
  • Stochastics

Underlay indicators are also called oscillators, because they move between fixed values (0–100).

⭐ 2. Moving Averages (MA)

A Moving Average is just an average of the last X days that keeps updating every day.

Analogy (Cricket Example)

Imagine calculating the last 5-match average of a batsman.
When match 6 happens, match 1 is dropped and match 2–6 are averaged.

This is exactly how a moving average works:

  • New price comes in
  • Oldest price is removed
  • The average moves → Moving Average

Why Traders Use MA

  • Gives a clean “baseline” of the price
  • Smooths out noise
  • Helps identify trend direction
  • Works well on higher timeframes (daily, weekly)

Common MAs

  • 20-day MA → short-term
  • 50-day MA → medium-term
  • 100-day MA → long-term
  • 200-day MA → very strong long-term trend indicator

Trend Rule

  • Price above MA → bullish trend
  • Price below MA → bearish trend

⭐ 3. Exponential Moving Average (EMA)

EMA is an improved form of MA.

Why EMA is better

  • EMA gives more weight to recent prices
  • So it reacts faster to trend changes

Difference

  • SMA: slow & smooth
  • EMA: fast & sensitive

Example:
When the price falls suddenly, EMA turns downward faster than SMA.

Traders prefer EMA because it is more responsive.

⭐ 4. MACD (Moving Average Convergence Divergence)

MACD is a momentum indicator created by Gerald Appel.

How MACD is calculated

  1. MACD Line = 12-day EMA − 26-day EMA
  2. Signal Line = 9-day EMA of MACD Line
  3. Histogram = MACD Line − Signal Line

MACD moves above and below zero:

  • Above zero → bullish momentum
  • Below zero → bearish momentum

How Traders Use MACD

A. Histogram Zero-Crossing

  • Histogram rises above zero → trend turning up
  • Histogram falls below zero → trend turning down

B. MACD Line & Signal Line Cross

  • MACD crosses above Signal → bullish
  • MACD crosses below Signal → bearish

Key Strength

MACD shows both:

  • Trend direction
  • Momentum strength

⭐ 5. RSI (Relative Strength Index)

Created by J. Welles Wilder, RSI measures momentum and compares up days vs. down days.

RSI moves between 0 to 100, with key zones:

  • Above 70 → Overbought (price may pause or fall)
  • Below 30 → Oversold (price may bounce)

Examples

If RSI < 30 → selling pressure is high → short-term bounce likely
If RSI > 70 → buying pressure is high → short-term correction likely

RSI Problem: Stickiness

Sometimes price stays overbought for weeks, especially in strong uptrends.
Example: RSI stays around 75–80 without falling → trend is powerful.

So RSI should not be used alone.

⭐ 6. Summary of All Indicators

Indicator Type Use
SMA Trend Simple average of price
EMA Trend Faster, reacts quickly
MACD Momentum + Trend Zero-line shifts & crossovers
RSI Momentum Shows overbought & oversold

⭐ Final Learning Advice

To build strong technical analysis skills:

  • Use higher timeframes (Daily, Weekly)
  • Combine indicators (MA + RSI or RSI + MACD)
  • Always read price action along with indicators
  • Indicators increase probability, not guarantees


Krishicode

Posted by Krishicode