Indicators are mathematical calculations applied to price and volume data. They help you confirm what the chart is telling you — but they should never replace reading the chart itself. Think of them as supporting evidence, not the verdict.
Leading vs Lagging Indicators
Lagging indicators confirm what has already happened (e.g., moving averages — they follow price). Leading indicators attempt to predict what will happen next (e.g., RSI — it can signal a reversal before it occurs). Most indicators are lagging.
Moving Averages (MA)
SMA (Simple Moving Average): adds up the last N closing prices and divides by N. Smooth, slow to react. The 200 SMA is watched by virtually every institutional trader.
EMA (Exponential Moving Average): gives more weight to recent prices, so it reacts faster. The 9 and 21 EMAs are popular for short-term trading.
Key Concept
Moving average crossovers: When a short MA crosses above a long MA, it is a buy signal. When it crosses below, it is a sell signal. Price above the 200 MA = generally bullish. Price below = generally bearish. MAs also act as dynamic support and resistance — price often bounces off them.
RSI (Relative Strength Index)
RSI measures the speed and magnitude of recent price changes on a scale of 0-100.
- Above 70 = overbought (the asset may be overvalued, potential reversal down)
- Below 30 = oversold (the asset may be undervalued, potential reversal up)
- Divergence = when price makes a new high but RSI does not, it signals weakening momentum
MACD (Moving Average Convergence Divergence)
MACD shows the relationship between two EMAs (usually 12 and 26 period). It has three components: the MACD line, the signal line (9-period EMA of MACD), and the histogram (difference between the two).
When the MACD line crosses above the signal line, it is a bullish signal. When it crosses below, bearish. The histogram shows the strength of the momentum — bigger bars mean stronger momentum.
Bollinger Bands
Three lines: a 20-period SMA in the middle, and two bands plotted 2 standard deviations above and below. The bands expand when volatility is high and contract when volatility is low.
Example
Bollinger Squeeze: When the bands contract tightly, it means volatility is unusually low. This is often the calm before the storm — a big move is coming. You do not know which direction, but you know it will be significant. Traders watch for the breakout direction and then follow it.
Warning
Do not use more than 2-3 indicators at once. More indicators does not mean better analysis — it means a cluttered, unreadable chart. Pick indicators that complement each other (e.g., one trend indicator and one momentum indicator) rather than ones that show the same thing.
Risk Disclaimer: Trading financial markets involves significant risk of loss. The content on this page is for educational purposes only and does not constitute financial advice. Past performance is not indicative of future results. You should not trade with money you cannot afford to lose. 70-80% of retail investor accounts lose money when trading CFDs and spread bets. Consider whether you understand how these products work and whether you can afford the high risk of losing your money.