Technical Indicators

1. What an indicator is

An indicator is a calculation applied to price, volume or both. It turns raw data into a line, a band or an oscillator that is easier to read. Every indicator is a lagging summary of the past. Use them to describe the current state of the market and to manage risk, not to predict the next price with certainty.

2. The four families

• Trend indicators (moving averages, ADX): tell you the direction and, for ADX, the strength of the trend.
• Momentum indicators (RSI, MACD, stochastic): measure the speed of price moves and whether they are speeding up or slowing down.
• Volatility indicators (Bollinger Bands, ATR): show how much price moves, which sets expectations and stop distances.
• Volume indicators (volume, OBV, VWAP): show whether a move has participation behind it.

A simple set for beginners: one trend tool, one momentum tool, one volatility tool for risk, and volume.

3. Moving averages: direction and support

A moving average smooths price. The 20, 50 and 200-period averages are the most watched. Price above a rising average suggests an uptrend; below a falling average suggests a downtrend. Averages can also act as dynamic support or resistance. Crossovers, such as a 50-period average crossing above a 200-period average (golden cross), are widely watched but lag.

Example: the 20-period EMA is at ₹248 and rising, price pulls back to ₹249 and bounces with volume. Many traders see this as a trend-following entry, with a stop below ₹244.

4. RSI: momentum and overbought zones

RSI compares the size of recent gains with recent losses over 14 periods, on a 0 to 100 scale. A reading above 70 is called overbought and below 30 oversold. In a strong uptrend, RSI often stays between 40 and 80. Pullbacks to the 40 to 50 zone in an uptrend are a common use.

Example: RSI drops to 42 during a pullback in an uptrend and turns up. That is a pullback entry signal for trend traders, not a sell signal.

5. MACD: trend and momentum together

MACD subtracts a 26-period EMA from a 12-period EMA. The signal line is a 9-period EMA of MACD. The histogram shows the gap between them. A MACD line crossing above the signal line is a bullish momentum signal. Crossings below zero are usually weaker than crossings above zero. Shrinking histogram bars warn that momentum is slowing before the cross happens.

6. Stochastic: where the close sits in the range

The stochastic oscillator shows where the latest close sits within the recent high-low range. Readings above 80 suggest overbought and below 20 oversold. It is quick and useful in sideways markets, but in strong trends it can stay overbought for a long time. Use it to time entries near the edges of a range.

7. Bollinger Bands: volatility and extremes

Bollinger Bands place two bands two standard deviations above and below a 20-period average. Most price action stays inside. Narrow bands (a squeeze) often come before a larger move. Price touching a band is not a signal by itself; a close outside the band with volume is more meaningful. In a strong trend, price can ride along a band.

8. ATR: the most practical risk tool

ATR (average true range) measures the average daily range over 14 periods. It is not a direction tool. Use it to set stops and size positions: a stop 2 times ATR away gives normal noise room, and the position size is set so the loss at that stop equals your planned risk.

Example: ATR is ₹4, entry ₹250, stop 2 × ATR = ₹8 below, so stop ₹242. With ₹1,000 maximum loss, size = 1,000 ÷ 8 = 125 shares.

9. ADX: is the market trending at all?

ADX measures trend strength on a 0 to 100 scale, without direction. Readings below 20 suggest a weak trend or a range; above 25 suggest a trend. The +DI and -DI lines show direction. A rising ADX above 25 with +DI above -DI supports trend-following entries. A falling ADX from high levels often means the trend is tiring.

10. Volume, OBV and VWAP

• Volume: compare each candle's volume with a 20-period average. Breakouts need above-average volume to be trusted.
• OBV (on-balance volume): a running total that adds volume on up days and subtracts on down days. If price makes a new high but OBV does not, buyers are weakening.
• VWAP (volume-weighted average price): the average price for the session, weighted by volume. Intraday traders use it to see whether buyers or sellers control the day.

11. Building a set that works together

Choose one tool from each family you need. Example for a swing trader: 20 and 50 EMA (trend), RSI (timing of pullbacks), ATR (stops and size), volume (confirmation). Check that the tools agree before acting. If trend says buy, momentum says overbought and volume is falling, wait.

12. Testing an indicator before you trust it

Pick the rule before you look at results: for example, buy when RSI crosses above 30 in an uptrend, exit at a 2 times ATR target or a stop. Write down 30 to 50 signals on past charts, including the losing ones. Count the win rate, average win and average loss. An indicator is worth keeping only if the average result after costs is positive.

13. Common indicator mistakes

• Adding indicators until the chart looks busy. More tools do not mean more certainty.
• Changing settings after seeing the result. Pick settings in advance and keep them.
• Treating overbought and oversold as automatic sell and buy signals in a strong trend.
• Ignoring the timeframe. An indicator on a 5-minute chart can contradict the daily chart.
• Using lagging indicators alone for exits, which leaves profits behind.