Technical Indicators: A Quick Primer

Technical indicators are calculations based on price and/or volume that help traders read trends, momentum, volatility and participation. None of them predict the future on their own. They work best in combination and alongside price action and risk management.

1. Trend Indicators (Which way is price moving?)

• Simple Moving Average (SMA): The average closing price over a set number of periods (e.g., 50-day, 200-day). Smooths out noise to show the underlying trend. Price above a rising SMA is generally read as an uptrend.
• Exponential Moving Average (EMA): Like the SMA but gives more weight to recent prices, so it reacts faster. Commonly used periods are 9, 20 and 50.
• Moving Average Crossovers: When a shorter MA crosses above a longer one (e.g., 50 over 200, the “Golden Cross”) it suggests strengthening trend; the reverse is the “Death Cross.” These signals are lagging by nature.
• MACD (Moving Average Convergence Divergence): The difference between the 12 and 26 EMA, plotted with a 9-period signal line and a histogram. Crossovers and histogram shifts indicate changes in trend direction and momentum.
• ADX (Average Directional Index): Measures trend strength, not direction, on a 0–100 scale. Readings above roughly 25 suggest a strong trend; below 20 suggests a weak or sideways market.
• Supertrend: A trailing line based on ATR that flips above or below price. Popular in Indian markets for spotting trend direction and setting trailing stops.
• Parabolic SAR: Dots placed above or below price that trail the trend. A flip in dot position signals a possible reversal; works poorly in sideways markets.

2. Momentum Indicators (How fast is price moving?)

• RSI (Relative Strength Index): Oscillates between 0 and 100. Traditionally, above 70 is “overbought” and below 30 is “oversold.” In strong trends RSI can stay in these zones for a long time, so it shouldn’t be used alone.
• Stochastic Oscillator: Compares the closing price to its range over a period (usually 14). Readings above 80 / below 20 mark overbought / oversold zones; %K and %D line crossovers are watched for signals.
• Rate of Change (ROC): The percentage change in price over a set period. Shows the speed of a move and can flag slowing momentum.
• CCI (Commodity Channel Index): Measures how far price has moved from its statistical average. Values beyond +100 / −100 indicate unusually strong moves.
• Divergence (a concept, not an indicator): When price makes a new high or low but the momentum indicator doesn’t, it can hint that the move is losing strength.

3. Volatility Indicators (How much is price swinging?)

• Bollinger Bands: A 20-period SMA with bands two standard deviations above and below. Bands widen in volatile periods and narrow (“squeeze”) in quiet ones, which often precede bigger moves.
• ATR (Average True Range): The average range of price movement over a period (usually 14). Doesn’t show direction; widely used for setting stop-loss distances and position sizing.
• Keltner Channels: Similar to Bollinger Bands but built around an EMA using ATR. Smoother and less reactive to sudden spikes.
• India VIX: Not a chart indicator for individual stocks, but the market’s “fear gauge,” derived from Nifty option prices. A rising VIX reflects expectations of higher volatility.

4. Volume Indicators (Is there participation behind the move?)

• Volume: The most basic one. Moves on higher-than-average volume are generally considered more meaningful than moves on thin volume.
• OBV (On-Balance Volume): A running total that adds volume on up days and subtracts it on down days. Used to check whether volume is confirming the price trend.
• VWAP (Volume Weighted Average Price): The average price weighted by volume, reset each session. Widely used by intraday traders and institutions as a benchmark for “fair” price during the day.
• MFI (Money Flow Index): Often called a volume-weighted RSI. Above 80 / below 20 suggests overbought / oversold conditions with volume taken into account.
• Accumulation/Distribution Line: Uses where the close falls within the day’s range, weighted by volume, to estimate buying versus selling pressure.

5. Support/Resistance Tools

• Pivot Points: Levels calculated from the previous period’s high, low and close. Common among intraday traders for identifying potential support and resistance.
• Fibonacci Retracements: Horizontal levels (23.6%, 38.2%, 50%, 61.8%) drawn between a swing high and low, used to anticipate where a pullback might pause.

Points to Keep in Mind

• Most indicators are derived from price, so they lag. Price action comes first.
• Using several indicators of the same type (e.g., RSI + Stochastic + CCI) mostly repeats the same information. Combining different categories, say one trend, one momentum and volume, is more informative.
• Default settings aren’t magic. They suit some timeframes and instruments better than others.
• Indicators that work well in trending markets often give false signals in sideways ones, and vice versa.
• Always backtest or paper-trade before relying on any setup.

Disclaimer: This post is for educational purposes only and is not investment advice or a recommendation to buy or sell any security. Please do your own research or consult a SEBI-registered advisor before making investment decisions.