Technical Indicators
26 articles · 20 glossary terms
Moving averages, oscillators, volatility bands and volume measures — how each is calculated, what it actually claims, and where it fails.
Foundations
Start here if the subject is new.What Technical Analysis Is, and What It Is Not
Technical analysis studies price and trading volume to describe the balance of supply and demand. It describes conditions; it does not forecast outcomes.
Moving Averages: Simple and Exponential
A moving average is the average of recent closes, redrawn each bar. A simple one weights every close equally; an exponential one weights recent closes more, so it turns sooner. Both turn a jagged series into a slope.
The Golden Cross and the Death Cross
A golden cross is the 50-day moving average crossing above the 200-day; a death cross is the reverse. Both are widely reported, heavily lagging, and describe a trend that has already turned.
RSI: The Relative Strength Index
RSI (Relative Strength Index) is a 0 to 100 oscillator comparing recent gains with recent losses. Above 70 is called overbought and below 30 oversold, and those thresholds are conventions rather than rules.
Volume and On-Balance Volume
Trading volume is the number of shares that changed hands. It measures participation, and it is the one chart input that is not a transformation of price, which is what makes it worth reading on its own.
Relative Volume (RVOL)
Relative volume (RVOL) is a stock's volume divided by its own average volume, so 3 means three times the usual participation. It measures how unusual activity is, and says nothing about direction.
Intermediate
Assumes the foundations above.MACD
MACD (moving average convergence divergence) plots the gap between a 12-period and a 26-period exponential moving average, with a signal line. It is unbounded, which makes it a trend indicator in an oscillator's clothes.
Bollinger Bands
Bollinger Bands are a moving average with bands set a number of standard deviations above and below it. The bands widen and narrow with volatility, which is the whole point of them.
ATR: Average True Range
ATR (Average True Range) measures how far a security typically moves in a period, gaps included. It has no direction, which is what makes it useful for sizing positions and placing stops.
The Stochastic Oscillator
Where the close sits inside the recent high-low range, expressed 0 to 100. It asks a different question from RSI and reaches extremes far more readily.
VWAP
VWAP (volume-weighted average price) is the average price every share traded at during a session, weighted by volume. It is an execution benchmark for institutions first and a chart reference second.
Fibonacci Retracements
Fibonacci retracements are levels drawn at set fractions of a prior move, such as 38.2, 50 and 61.8 percent. Their mathematical case is weak; their relevance comes from how many people draw them.
Pivot Points
Reference levels computed mechanically from the prior period's high, low and close. Their appeal is that they are fixed in advance and identical for everyone.
Relative Strength Against the Market
Relative strength is how a stock performs against a benchmark rather than in isolation. A stock down 3 percent on a day the index fell 6 has outperformed. It is a different measure from RSI.
Keltner and Donchian Channels
Two envelope constructions that answer different questions: one is built from average range, the other from the highest high and lowest low over a window.
Parabolic SAR
A trailing stop that accelerates. It is always in the market, always on one side, and it flips when price reaches it.
CCI and Williams %R
Two more oscillators. Both normalize price against a recent range, which is what almost every oscillator does, and the differences are in the arithmetic rather than in the information.
Money Flow Index
RSI with volume weighting. It is one of the few oscillators that introduces an input other than price, which is the whole of its claim.
Divergence, Across Indicators
Divergence is price making a new high or low while an indicator does not. It is the most cited observation in chart reading and one of the weakest, for a reason that follows from how indicators are built.
Advanced
Detail, edge cases and methodology.ADX and Trend Strength
ADX measures how strongly a market is trending without saying which way. Its real use is deciding which other indicators are appropriate right now.
Beta and Volatility
Two different measures of movement. Historical volatility says how much a security moves; beta says how much of that movement is shared with the market.
Ichimoku Kinko Hyo
Five lines intended to be read as one picture. Every component is a midpoint of a range or a shifted copy, which is what makes the whole thing derived from the same series.
Volume Profile
Volume plotted against price rather than against time. It answers where trading happened, which a conventional volume bar cannot.
Market Profile
A distribution of time spent at each price rather than volume. Built for a session, it describes where the market accepted a price and where it rejected one.
Elliott Wave, Assessed
A framework describing price as a nested sequence of five-wave and three-wave structures. Widely followed, and difficult to falsify in the form it is usually applied.
The Wyckoff Method, Assessed
A framework describing markets as cycles of accumulation and distribution driven by large operators. Its mechanism is plausible; its identification is retrospective.
Terms Defined in This Subject
Open one for its definition, and the article that explains it in full.
Frequently Asked Questions
What is RSI and what does overbought mean?
RSI, the Relative Strength Index, is an oscillator from 0 to 100 that compares the size of recent gains with recent losses. A reading above 70 is conventionally called overbought and below 30 oversold. Those labels describe a one-sided recent record, and in a strong trend RSI can stay above 70 for a long time.
Read the full article: RSI: The Relative Strength IndexWhat is VWAP?
VWAP, the volume-weighted average price, is the average price every share traded at during a session, weighted by how many shares traded at each price. It resets each day. Institutions measure their execution against it, and traders read price above or below VWAP as a quick summary of where the session's average buyer stands.
Read the full article: VWAPWhat is the difference between a simple and an exponential moving average?
A simple moving average gives every close in its window equal weight. An exponential moving average gives recent closes more weight, so it turns sooner after a change in direction and also reacts more to noise. Both lag price, because both are built entirely from closes that have already happened.
Read the full article: Moving Averages: Simple and ExponentialDo technical indicators predict price?
No indicator predicts price. Every one is a calculation on past open, high, low, close and volume, so it restates information already on the chart in a different form. Indicators are useful for measuring things such as trend, stretch and volatility consistently, which is a different job from forecasting.
Read the full article: What Technical Analysis Is, and What It Is Not