Popular Technical Indicators

Beyond trend lines and price levels, traders use a large family of computed indicators — formulas that transform price and volume into readings meant to summarize momentum, trend strength, or volatility. This is a survey of the ones encountered most often. Indicators are descriptions of the past, each with a known blind spot; none of them, singly or combined, is a decision by itself. Knowing what each one actually measures is the difference between using them and being used by them.

RSI (Relative Strength Index)

The RSI compares the size of recent gains to recent losses and expresses the balance as a number scaled from 0 to 100. High readings mean recent sessions have been dominated by gains; low readings, by losses. By long-published convention, readings above 70 are described as "overbought" and below 30 as "oversold," though those labels mislead: in a strong trend the RSI can sit above 70 for weeks while price keeps rising, because the indicator measures the pace of gains, not their exhaustion. What the RSI does badly is exactly that — in persistent trends its extreme zones fire early and stay fired. It is most informative in range-bound markets and when its direction disagrees with price, a pattern called divergence.

MACD (Moving Average Convergence Divergence)

The MACD is built from moving averages: it tracks the difference between a faster and a slower exponential average of price (the MACD line) against a smoothed version of that difference (the signal line). When the MACD line crosses above the signal line, the short-term trend has recently strengthened relative to the longer one; below, it has weakened. A histogram shows the gap between the two lines widening or narrowing. MACD's strength is that it combines trend-following and momentum in one reading. Its weakness is inherited from all moving averages: it lags, it whipsaws in sideways markets, and it has no natural scale — a MACD value means nothing across different stocks, only its direction and crossings carry meaning. The averages underneath it are covered in Trend and Moving Averages.

Stochastic oscillator

The stochastic asks a locational question: within the recent high-to-low range, where did price close? Its %K line expresses that position as a percentage, and %D is a smoothed version of %K. Closes persistently near the top of the range produce high readings — by convention, above 80 is called overbought territory and below 20 oversold. The logic is that in an advance, closes cluster near highs; when they start clustering near lows instead, momentum may be shifting. The stochastic is the most sensitive tool in this survey — it reacts fastest and, as the price of that speed, produces the most false alarms, pinning at extremes throughout strong trends. It rewards traders in choppy, range-bound conditions and punishes them in trending ones.

Bollinger Bands

Bollinger Bands wrap price in an envelope: a moving average in the middle, with bands above and below set at a distance based on recent volatility (standard deviation). When the market quiets, the bands squeeze together; when it erupts, they widen. Traders read price touching the upper band not as "too high" but as "strong, relative to recent norms" — in an uptrend, price can ride the upper band for an extended run. The bands' real subject is volatility itself: the squeeze is one of the more watched setups in charting, because compressed volatility tends to precede expanded volatility, though the bands don't say in which direction. What they do badly: they contain no information about trend direction on their own, and treating band touches as automatic reversal signals is a reliable way to fight strong moves.

ADX (Average Directional Index)

The ADX measures trend strength without regard to direction, on a 0-to-100 scale. By common convention, readings below about 20 describe a market with no meaningful trend, and readings above about 25 a market with a real one — the higher, the stronger. Companion lines derived from the same calculation indicate which direction the trend runs. ADX's niche is answering the question other indicators dodge: "is there a trend here worth following at all?" Used that way, it helps traders choose between trend-following tools and range tools. Its flaws: it lags considerably, since it's an average of averages, and it says nothing about when a strong trend is tired — a trend can be at maximum measured strength the day before it ends.

ATR (Average True Range)

The ATR measures how much a stock typically moves in a day, expressed in price units rather than percentages. It accounts for gaps by using the "true range" — the largest of the day's high-low span and the distances from yesterday's close to today's high and low. ATR is not a directional indicator at all; it's the market's recent stride length. Its practical uses are calibration: how far a stop can reasonably sit, how large a position is prudent given the stock's daily swings (see Drawdowns and Position Sizing), and whether current volatility is high or low for that stock historically. What it does badly is anything predictive — a rising ATR says movement has been large, not that it will continue or reverse.

Using indicators responsibly

Every indicator in this survey is a re-description of price (and sometimes volume) — none adds new information, so stacking several that measure the same thing mostly manufactures false confidence. The durable habits: know what each tool measures and what it does badly; use few, and use them consistently; and judge any tool the way you'd judge a signal service, by a defined rule and an honest track record. Terminology across this page is collected in the Glossary.

Educational material only — not investment advice.