5 Key Technical Analysis Indicators Used in Trading

Key Points

Technical analysis (TA) indicators help traders understand asset price movements, making it easier to identify patterns and potential trading signals. Among the many available TA indicators, some of the most popular options include RSI, moving averages, MACD, StochRSI and Bollinger Bands. Whilst technical analysis indicators can be very useful, interpreting their data can be subjective. To reduce risks, many traders use TA indicators in combination with fundamental analysis and other methods.

Introduction

Indicators on charts are the weapon of choice for battle-tested technical analysts. Each player selects the tools that best suit their unique trading style, then learns to master their craft. Some prefer to watch market momentum, whilst others want to filter out market noise or measure volatility.

But which technical indicators are the best? Well, every trader will tell you something different. However, there are some very popular ones, such as those listed below (RSI, MA, MACD, StochRSI and BB). Interested in learning what they show and how to use them? Then read on.

Why Are Technical Analysis Indicators Needed?

Traders use technical indicators to gain additional information about an asset's price movement. These indicators simplify the identification of potential patterns and buy or sell signals in the current market environment.

There are many types of indicators, and they are widely used by day traders, swing traders, and sometimes even long-term investors. There are also professional analysts and advanced traders who create their own indicators.

In this article, we provide a brief overview of some of the most popular technical analysis indicators that can be useful in any trader's market analysis toolkit.

1. Relative Strength Index (RSI)

RSI is a momentum indicator that shows whether an asset is overbought or oversold. It does this by measuring the magnitude of recent price changes. The standard setting is the previous 14 periods (14 days for daily charts, 14 hours for hourly charts, and so on). The data is then displayed as an oscillator, which can have values ranging from 0 to 100.

Because RSI is a momentum indicator, it shows the speed (momentum) at which the price changes. This means that if momentum increases when the price rises, the uptrend is strong and more and more buyers are entering the market. Conversely, if momentum decreases whilst the price rises, this may indicate that sellers could soon take control of that market.

The traditional interpretation of RSI is that when it exceeds 70, the asset is most likely overbought, and when below 30, the asset is oversold. Therefore, extreme values can indicate an approaching trend reversal or pullback. However, it is better not to think of these values as a direct buy or sell signal. Like many other technical analysis methods, RSI can give false or misleading signals, so it is always useful to consider other factors before entering a trade.

2. Moving Average (MA)

The purpose of using a moving average on financial charts is to smooth out price action and highlight the direction of the market trend. Because they are based on past price data, moving averages are considered lagging indicators.

The two most common moving averages are the simple moving average (SMA or MA) and the exponential moving average (EMA). The SMA is constructed by taking price data over a certain period and calculating the average value. For example, a 10-day SMA is constructed by calculating the average price over the last 10 days. The EMA, on the other hand, is calculated in such a way as to give greater weight to recent price data. This makes the indicator more sensitive to recent price movement.

As mentioned earlier, the moving average is a lagging indicator. The longer the period, the greater the signal lag. Therefore, a 200-day SMA will respond much more slowly to recent price changes than a 50-day SMA.

Traders often use the relationship between price and certain moving averages to assess the current market trend. For example, if the price remains above the 200-day SMA for an extended period, many traders may consider the asset to be in a bullish market.

Traders can also use moving average crossovers as buy or sell signals. For example, if the 100-day SMA crosses below the 200-day SMA, this can be considered a sell signal. What does this mean? It indicates that the average price over the last 100 days is now lower than over the last 200 days. The idea behind selling here is that short-term price movements are no longer following the uptrend, so the trend is likely to reverse soon.

3. Moving Average Convergence/Divergence (MACD)

MACD is a technical indicator designed to determine future price movement of an asset by using the relationship between two moving averages. It consists of two lines: the MACD line and the signal line. The MACD line is calculated by subtracting the 26-day EMA from the 12-day EMA, after which the result is plotted on a 9-day EMA, which serves as the signal line. Many charting tools often include a histogram that shows the distance between these signal lines.

By looking for divergence between MACD and price movement, traders can gain insight into the strength of the current trend. For example: if the price shows a new high whilst MACD displays very low readings, this suggests that the market may reverse soon. What is MACD telling us in this case? The price is rising, but momentum is decreasing, so there is a greater likelihood of a pullback or reversal.

In addition to this, traders can use this indicator to look for crossovers between the MACD line and its signal line. Generally, a buy signal is considered when the MACD line crosses above the signal line from below. Conversely, a sell signal is the point where the signal line crosses below the MACD line from above.

MACD is often used in combination with RSI, as they both measure momentum but based on different factors. It is assumed that together they can provide a more complete technical picture of the market.

4. Stochastic RSI (StochRSI)

Stochastic RSI is an oscillator that tracks price movements to determine overbought or oversold conditions of an asset. As the name suggests, stochastic is a derivative of the regular RSI, which is formed based on underlying indicators rather than price data. The indicator is calculated by applying the stochastic RSI formula to regular RSI values. The standard settings for the indicator range from 0 to 1 (or 0 to 100).

Due to its high speed and sensitivity, stochastic RSI can generate many complex trading signals that are difficult to interpret. Generally, it tends to be most useful when readings are near the upper or lower bounds of its range.

If the stochastic RSI reading is above 0.8, it is considered overbought, and a value below 0.2 may indicate oversold conditions. A value of 0 means that RSI has its lowest value during the measured period (the default setting is usually 14). Otherwise, a value of 1 means that RSI has its highest value during the measured period.

Similar to how RSI should be used, overbought or oversold values for StochRSI do not necessarily mean that the price will reverse. In this case, it simply indicates that the RSI values (on which the StochRSI values were based) are close to extreme readings. It is also important to bear in mind that StochRSI is more sensitive than the RSI indicator, so it tends to generate false or misleading signals more frequently.

5. Bollinger Bands (BB)

Bollinger Bands measure market volatility as well as overbought and oversold conditions. The indicator consists of three bands – an SMA (middle line), and upper and lower lines. Settings may vary, but typically the upper and lower lines are two standard deviations away from the middle line. As volatility increases and decreases, the distance between the lines increases and decreases.

Often, the closer the price is to the upper line, the closer the asset may be to overbought conditions as shown on the chart. Conversely, the closer the price is to the lower line, the closer it may be to oversold conditions. Most of the time, the price will remain within the lines, but in certain cases it can break above or below them. Whilst this event may not be a trading signal, it can indicate extreme market conditions.

Another important concept in Bollinger Bands is called a squeeze. This refers to a period of low volatility when all the lines are very close to each other. In this situation, the indicator can signal potential volatility in the future. Conversely, if the lines are far apart from each other, this may indicate a possible decrease in price fluctuations.

Conclusion

Although technical indicators provide data that will make it easier for you to navigate the market, it is important to remember that the interpretation of such data is extremely subjective. Therefore, before creating your trades, you need to ensure that your personal biases do not influence your decision-making. What may be a direct buy or sell signal for one trader may simply appear as market noise to another.

As with most market analysis methods, indicators work best when combined with each other or with other methods, such as fundamental analysis (FA). The best way to learn technical analysis is through extensive practice.

FAQ

What are the top 5 technical analysis indicators?

五大技术分析指标包括：移动平均线（MA）用于趋势判断，相对强弱指数（RSI）衡量超买超卖，MACD检测动量变化，布林带确定支撑阻力，交易额柱状图反映市场热度。这些指标结合使用能更准确预测价格走势。

What is the 5-3-1 rule in trading?

5-3-1規則是交易策略，指5筆交易中獲利3筆，虧損2筆。通過控制風險回報比例（通常1:2），確保整體收益為正。這是風險管理的基本框架。

What is the 3 5 7 rule in trading?

3 5 7规则是技术分析中的交易策略，使用3日、5日、7日移动平均线组合。当短期均线上穿长期均线时产生买入信号，下穿时产生卖出信号。该规则帮助交易者识别趋势转折点和交易额变化。

What indicators do professional traders use?

Професійні трейдери використовують 5 ключових технічних індикаторів: рухому середню（MA），індекс відносної сили（RSI），MACD，Bollinger Bands та обсяг торгівлі. Ці індикатори допомагають визначити тренди，момент та точки входу/виходу з позицій.