Technical Indicators

Technical indicators are tools used to analyze price action.
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A technical indicator uses a particular formula to generate data points. The data points are then used to create alerts, confirm other indicators or analysis, and forecast price.

Technical overlays use the same scale as price, while technical indicators may be plotted independently.

Technical indicators provide for technical analysis what financial ratios provide for fundamental analysis.

Simple Moving Average (SMA)

A simple moving average is an arithmetic average of a set of data points where each data point is added together and then divided by the total number of data points.

For example, a 10-period simple moving average finds the closing price of the last 10-periods, sums the 10 closing prices, and divides by 10 to calculate the average closing price of the previous 10 periods. New periods are then added to the calculation, while the oldest period is deleted from the calculation.

The simple moving average is typically plotted as a technical overlay. A simple moving average is a smoothing tool to display trends for a specific number of periods.

Simple moving averages can be used for short periods of time, such as the last 5 or 10 periods on an intraday chart, or long periods of time, such as 10 or 20 periods on a monthly or annual chart.

Exponential Moving Average (EMA)

An exponential moving average is the weighted average of a set of data points where new data points receive greater weight in the average calculation.

An exponential moving average is a technical indicator of a trend that responds faster to new data points than a simple moving average because a multiplier is used to give preference to the new data points and reduce lag in responsiveness to price movements.

Moving Average Convergence/Divergence (MACD)

The moving average convergence/divergence (MACD) is a technical indicator of momentum that uses moving averages to determine a trend’s strength. The MACD uses three exponential moving averages (a short term, a long term, and the average difference between the short and long term) to show price momentum.

The MACD indicates changes in the direction of a trend, as well as overbought and oversold conditions, by showing the turning points where the signal line crosses over the other moving average lines. The MACD may be displayed as a line chart or a histogram.

Relative Strength Index (RSI)

The relative strength index (RSI) is a technical indicator of momentum that measures the speed and change of price on a scale of 0 to 100, typically over the past 14 periods. Readings over 70 are considered overbought, while readings below 30 are considered oversold.

RSI is also used to confirm price action for a security. For example, if a stock makes a new high, but RSI fails to make a new high, then there is a divergence between price and momentum.

Rate of Change

Rate of change is a technical indicator of momentum that measures the percentage change in price from period to period.

Rate of change is also referred to as “momentum” and is often used to confirm trends. For example, when a security reaches a new high but the rate of change does not, then there is a negative divergence between price and momentum.

Stochastic Oscillator

The stochastic oscillator is a technical indicator of momentum that shows where the closing price for a period fits in the relative high-low range of a lookback period, typically 14 periods. The stochastic oscillator expresses the closing price for a period as a percentage of the recent high and low for a security.

There are three varieties of stochastic oscillators: fast, slow, and full.

Bollinger Bands

Bollinger bands are a chart overlay, volatility indicator that shows the upper and lower range of normal price movement based on standard deviation.

The centerline of Bollinger bands is typically a 20-day simple moving average while the upper and lower bands are twice the 20-day standard deviation of price above and below the centerline.

Bollinger bands measure price volatility: when the bands widen, price volatility is increasing. When the bands contract, volatility is decreasing.

Ichimoku Cloud

The Ichimoku cloud is a technical indicator that depicts support, resistance, momentum, and trend in one chart overlay. Ichimoku clouds provide a number of indicators at a glance by using a variety of moving averages and other calculations to indicate areas of support and resistance on a price chart.

Five lines come together to form the “cloud” and support and resistance areas. Various crossings of the five lines produce trading signals and are similar to moving average crossover systems but provide additional guide points for trade placement.

Keltner Channels

Keltner channels are a chart overlay, volatility indicator that shows the upper and lower channels, or range, of price movement based on an exponential moving average and the average true range for the channel’s width.

Whereas Bollinger bands are based on standard deviation, Keltner channels are based on the average true range. The center line in a Keltner channel is typically a 20-period moving average while the upper and lower bands are often two times the average true range.

Pivot Points

Pivot points are calculated values based on the prior period’s range to show potential support and resistance levels.

Pivot points take the prior day’s high, low, and close to calculate the pivot point, two levels of support, and two resistance levels. Pivot points were initially used by floor traders as a quick reference intraday.

Because pivot points are based on the prior day’s close, they are a relatively sensitive indicator because new pivot point levels are calculated daily.

Volume-Weighted Average Price (VWAP)

Volume-weighted average price (VWAP) combines price and volume to show where the average trading activity has taken place for a specified period. VWAP is calculated by dividing the total dollar value of all trades by the trading volume for the period referenced.

For example, intraday VWAP would take the total dollar value for all the trades for the current day and divide by the day’s trading volume.

VWAP is used to show both trend and demand for a security and is also used by institutions to assess the effectiveness of price execution for large orders.

Average True Range (ATR)

The average true range (ATR) is a technical indicator of volatility based on the average of a particular set of trading ranges over a defined number of periods.

The ATR is the average of the true range for a set of periods. The greatest of one of three ranges is calculated as the true range for a period: the current high minus the current low, the current high minus the previous period’s close, or the current low minus the previous close.

Once the true range is calculated, the average for a set lookback period is taken, typically 14 periods.

A decline in ATR indicates a decrease in recent volatility. An increase in ATR indicates an increase in recent volatility.

ATR is used in a number of ways, such as confirmation in breakout systems, with other indicators like Keltner channels, and in position sizing.

Chaikin Money Flow

The Chaikin money flow (CMF) is a technical indicator that uses price and volume to show the flow of funds into or out of a security by combining an accumulation and distribution indicator with an oscillator calculation.

Chaikin money flow is often used to confirm a price trend. If price is trending higher while the Chaikin money flow is also trending higher, CMF confirms the price action.

On Balance Volume (OBV)

On balance volume (OBV) is a technical indicator that uses price and volume to show the flow of funds into or out of a security. On balance volume is perhaps the best known volume-related indicator.

The day’s volume is adjusted for the change in direction (up or down) of price from the previous day and cumulated into the index. For example, if today’s closing price is higher than yesterday’s closing price, then the total daily volume is added to the index. The index is a cumulative value of price and volume data.

OBV is interpreted in relation to a price trend: rising volume in one direction confirms the price trend.

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FAQs

How do you calculate a simple moving average?

A simple moving average is an arithmetic average of a set of data points where each data point is added together and then divided by the total number of data points.

For example, a 10-period  simple moving average finds the closing price of the last 10-periods, sums the ten closing prices, and divides by 10 to calculate the average closing price of the last 10 periods. New periods are then added to the calculation while the oldest period is removed from the calculation.

A simple moving average is a smoothing tool to display trends for a specific number of periods.

Is simple moving average the same as moving average?

There are two types of moving averages: a simple moving average and an exponential moving average.

A simple moving average is an arithmetic average of a set of data points where each data point is added together and then divided by the total number of data points.

An exponential moving average is the weighted average of a set of data points where new data points receive greater weight in the average calculation.

Which is better: simple or exponential moving average?

Simple moving averages and exponential moving averages are both indicators that help to identify trends.

The main difference is that exponential moving averages respond faster to new data points than a simple moving average because a multiplier is used to give preference to the new data points and reduce lag in responsiveness to price movements.

Different investors have different preferences based on their trading strategy.

How accurate is divergence trading?

Divergence indicates changes in direction of a trend, as well as overbought and oversold conditions. MACD is arguably the most popular, but different indicators are used to identify divergence.

The accuracy of an indicator is subjective and varies based on many factors.

Is MACD a good indicator?

The moving average convergence/divergence (MACD) is a technical indicator of momentum that uses moving averages to determine a trend’s strength.

The MACD uses three exponential moving averages (a short term, a long term, and the average difference between the short and long term) to show price momentum.

The MACD indicates changes in direction of a trend, as well as overbought and oversold conditions, by showing the turning points where the signal line crosses over the other moving average lines.

Investors use MACD in various applications.

Is a high RSI good or bad?

The relative strength index (RSI) is a technical indicator of momentum that measures the speed and change of price on a scale of 0 to 100, typically over the past 14 periods.

Readings over 70 are considered overbought while readings below 30 are considered oversold.

A “high” reading, over 70, is neither good nor bad, but may indicate that a security is temporarily overbought. However, even if RSI is relatively high, security prices may continue to increase for an unknown period of time. 

How do you find the average rate of change?

Rate of change is a technical indicator of momentum that measures the percentage change in price from period to period. Rate of change is also referred to as “momentum” and is often used to confirm trends.

For example, a 10-period rate of change would take the last closing price, subtract the closing price 10-periods ago, divide that number by the closing price 10-periods ago, and multiply by 100.  

How do you use stochastic oscillator?

The stochastic oscillator is used to identify relative momentum trends.

The stochastic oscillator is a technical indicator of momentum that shows where the closing price for a period fits in the relative high-low range of a lookback period, typically 14 periods. The stochastic oscillator expresses the closing price for a period as a percentage of the recent high and low for a security.

There are three varieties of stochastic oscillators: fast, slow, and full.

How do you use Bollinger bands?

Bollinger bands are a chart overlay, volatility indicator that show the upper and lower range of normal price movement based on standard deviation.

The centerline of Bollinger bands is typically a 20-day simple moving average while the upper and lower bands are twice the 20-day standard deviation of price above and below the centerline.

Bollinger bands measure price volatility: when the bands widen, price volatility is increasing. When the bands contract, volatility is decreasing. 

When should you use Bollinger bands?

Bollinger bands are used to measure price volatility: when the bands widen, price volatility is increasing. When the bands contract, volatility is decreasing.

Different traders utilize Bollinger bands in different ways.

For example, mean reversion traders may use Bollinger bands to identify entries for potential price retracements when price moves outside the upper or lower band.

How do you read ichimoku cloud charts?

The Ichimoku cloud is a technical indicator that depicts support, resistance, momentum, and trend in one chart overlay.

Ichimoku clouds provide a number of indicators at a glance by using a variety of moving averages and other calculations to indicate areas of support and resistance on a price chart.

Five lines come together to form the “cloud” and support and resistance areas. In uptrends, the security’s price is above the cloud and the cloud indicates potential support areas in the future. In downtrends, the security’s price is below the cloud and the cloud indicates areas of potential resistance in the future.  

How are Keltner channels calculated?

Keltner channels are based on the average true range. Keltner channels are a chart overlay, volatility indicator that show the upper and lower channels, or range, of price movement based on an exponential moving average and the average true range for the channel’s width.

The center line in a Keltner channel is typically a 20-period moving average while the upper and lower bands are often two times the average true range. 

How do you trade Keltner channels?

Different traders utilize Keltner channels in different ways. For example, mean reversion traders may use Keltner channels to identify entries for potential price retracements when price moves outside the channel. Keltner channels are also used to identify changes in price trends.

How do you trade pivot points?

Pivot points are calculated values based on the prior period’s range to show potential support and resistance levels.

Pivot points take the prior day’s high, low, and close to calculate the pivot point, two levels of support, and two levels of resistance.

Pivot points were initially used by floor traders as a quick reference intraday. Because pivot points are based on the prior day’s close, they are a relatively sensitive indicator because new pivot point levels are calculated daily.

Because pivot points may identify potential support and resistance levels, traders may use them as entry and exit signals for short-term trades.

Are pivot points reliable?

Pivot points are calculated values based on the prior period’s range to show potential levels of support and resistance.

Pivot points take the prior day’s high, low, and close to calculate the pivot point, two levels of support, and two levels of resistance.

Pivot points provide price levels based on quantifiable attributes from price, so the levels are not subjective. However, the reliability of pivot points providing tradeable information is subjective, and would require extensive backtesting to determine if they are applicable for individual traders to implement into their strategies.

Which pivot points are best for intraday trading?

The best pivot points to use for intraday trading is subjective and would require extensive backtesting to determine if they are applicable for individual traders to implement. Different traders utilize different strategies, so what works well for one investor may not work for another.

Pivot points vary based on the timeframe referenced. For example, daily pivot points are based on the previous month’s data while intraday pivot points may be based on the previous day’s range for 1-, 5-, 10-, and 15-minute charts or the prior week’s range for 30-, 60- and 120-minute charts. 

What is a good VWAP?

Good VWAP is subjective, and would require extensive backtesting to determine if specific levels are useful to accomplish the goals of individual investors. Different traders utilize different strategies, so what works well for one investor may not work for another.

VWAP may be calculated using ticks or minute data from different intraday time frames. 

How do you read VWAP?

Volume-weighted average price (VWAP) combines price and volume to show where the average trading activity has taken place for a specified period.

VWAP is calculated by dividing the total dollar value of all trades by the trading volume for the period referenced. For example, intraday VWAP would take the total dollar value for all the trades for the current day and divide by the day’s trading volume.

VWAP is used to show both trend and demand for a security and is also used by institutions to assess the effectiveness of price execution for large orders.

What is average true range used for?

ATR is used in a number of ways, such as confirmation in breakout systems, with other indicators like Keltner channels, and in position sizing.

A decline in ATR indicates a decrease in recent volatility. An increase in ATR indicates an increase in recent volatility.

How is the average true range calculated?

The average true range (ATR) is a technical indicator of volatility based on the average of a particular set of trading ranges over a defined number of periods. The ATR is the average of the true range for a set of periods.

The greatest of one of three ranges is calculated as the true range for a period: the current high minus the current low, the current high minus the previous period’s close, or the current low minus the previous close.

Once the true range is calculated, the average for a set lookback period is taken, typically 14 periods.

How to use Chaikin money flow?

The Chaikin money flow (CMF) is often used to confirm a price trend. If price is trending higher while the Chaikin money flow is also trending higher, CMF confirms the price action.

Chaikin money flow is a technical indicator that uses price and volume to show the flow of funds into or out of a security by combining an accumulation and distribution indicator with an oscillator calculation.

What is Chaikins volatility?

Chaikins volatility demonstrates the variation of two different moving averages. The difference between the highs and lows quantifies the volatility as the range between the high and low prices. As the spread between the two widens, volatility increases.

How do you use the on balance volume indicator?

On balance volume (OBV) is interpreted in relation to a price trend: rising volume in one direction confirms the price trend. OBV is a technical indicator that uses price and volume to show the flow of funds into or out of a security.

On balance volume is perhaps the best known volume-related indicator. The day’s volume is adjusted for the change in direction (up or down) of price from the previous day and cumulated into the index.

For example, if today’s closing price is higher than yesterday’s closing price, then the total daily volume is added to the index. The index is a cumulative value of price and volume data.

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