Module 4: Technical Indicators in Trading

Technical indicators are mathematical transforms of price and volume. They do not predict the future; they structure historical data to help you assess probabilities, identify opportunities, and manage risk with objectivity.

From Dow’s principles to Wilder’s RSI/ADX and Appel’s MACD, computing enabled robust, rules-based analysis. Today’s edge comes from using indicators as lenses on price—not as oracles.

• Objectivity: Rules reduce emotional bias (e.g., RSI > 70 = overbought condition per plan).
• Trend & phase: MAs/ADX define direction and strength.
• Momentum: RSI/Stochastic gauge acceleration vs. fatigue.
• Volatility: ATR/Bands size stops and targets by regime.
• Confirmation: Confluence across tools increases conviction.

Indicators are transforms of price/volume that filter noise and expose structure, turning raw time‑series into actionable context.

1. Clarify trend and phase (e.g., SMAs/EMAs, ADX).
2. Time pullbacks/reversals (RSI, Stochastic).
3. Quantify volatility and risk (ATR).

Lagging (trend‑following)

• Smooth history; confirm direction with delay (MAs, MACD, ADX).

Leading (oscillators)

• Rate‑of‑change; great in ranges; early but noisy in trends (RSI, Stoch, CCI).

Trend indicators define direction, strength, and phase of a trend.

• Direction: Price vs. MA and MA slope (e.g., above rising 50/200).
• Strength: ADX rising above ~25 suggests trending conditions.
• Phases: Early (flat MAs), Middle (MAs fanned), Late (divergences/ADX rolling).

SMA / EMA / WMA

• SMA: Simple mean; clean long‑term filter; higher lag.
• EMA: Exponentially weighted; more responsive; popular for execution.
• WMA: Linear weights; fastest but most sensitive to noise.

Core uses

• Trend identification via slope/position.
• Dynamic S/R: pullbacks to 20/50 EMAs.
• MA ribbons for trend health and transitions.

Crossovers show shifts in short‑term momentum versus the prevailing trend.

• Golden/Death Cross: 50/200 SMA milestones.
• Tactical pairs: 9/21 or 12/26 EMAs for swing/intraday.
• Filter: Use structure/ADX and volume to avoid whipsaws.

• Components: MACD line (12−26 EMA), Signal (9 EMA of MACD), Histogram.
• Signals: Line crossovers, zero‑line crosses, histogram turns.
• Use: Confirmation within trend; time entries near zero in pullbacks.

• Zones: >70 overbought; <30 oversold; 50‑line as bull/bear momentum line.
• Divergences: Spot exhaustion or buildup.
• Trend tactics: Prefer buys when RSI holds 40–50 in uptrends.

Compares the close to the recent high–low range to show where price finishes within its window. Lines: %K (fast) and %D (smoothed).

Calculation

• %K: [(Close − Lowest Low) / (Highest High − Lowest Low)] × 100 (default n = 14).
• %D: 3‑period SMA of %K; Slow Stochastic applies extra smoothing.

Usage

• OB/OS: >80 / <20 are conditions, not automatic reversals.
• Crossovers: %K crossing %D from extremes is a tactical trigger.
• Divergences: Strengthen reversal case at range edges.

Volatility bands around a moving average (typically 20‑SMA) using standard deviation that expand/contract with volatility.

• Middle: 20‑SMA.
• Upper/Lower: Middle ± 2×StdDev(20) by default.

Key concepts

• Squeeze: Narrow bands (low BandWidth) often precede breakouts.
• Mean reversion: In ranges, tags tend to revert to the middle band.
• Trend riding: In trends, price can walk the band; a tag confirms strength.

Average True Range (ATR) measures typical range including gaps. It does not show direction—only volatility.

Practical uses

• ATR stops: Place stops 1.5–3×ATR from structure to avoid noise.
• Position sizing: Normalize risk sizing via ATR multiples.
• Breakout filters: Prefer closes ≥ 1×ATR beyond levels.

Momentum / ROC

• Momentum: Close − Close(n); zero‑line cross signals acceleration.
• ROC: Percent change; great for cross‑asset momentum comparison.

CCI

• Concept: Typical Price vs. its average/mean deviation; +100/−100 highlight extremes.
• Use: Cyclical turns and divergences; watch sustained moves above/below 0 for momentum bias.

On-Balance Volume (OBV)

• Definition: Cumulative volume added on up‑closes and subtracted on down‑closes.
• Use: Confirms trends; OBV making higher highs ahead of price can foreshadow breakouts.
• Divergence: Price up but OBV flat/falling → distribution risk; price down but OBV rising → accumulation.

Volume Profile (concepts)

• Value Areas: Price zones with heavy traded volume often act as magnets and support/resistance.
• POC (Point of Control): Highest volume price—watch reactions.
• Low Volume Nodes: Often become gap‑like areas that price may traverse quickly.

Wilder’s Directional Movement system quantifies directional pressure and overall trend strength.

• +DI / −DI: Positive/negative directional movement lines.
• ADX: Average Directional Index—strength only (not direction). Values above ~25 suggest trending conditions.

Signals

• Crossovers: +DI > −DI favors bulls (and vice versa).
• Trend filter: Engage trend strategies when ADX rises through ~20–25.
• Exhaustion: Very high ADX curling down can signal late‑trend risk.

Classical floor‑trader levels derived from the prior period’s high, low, and close. Popular for intraday bias and targets.

Formulas (Classic)

• PP: (H + L + C) / 3
• R1/S1: 2×PP − L / 2×PP − H
• R2/S2: PP + (H − L) / PP − (H − L)

Usage

• Open above PP → bullish bias; below PP → bearish bias (context dependent).
• Targets/turns at R1/R2/S1/S2; watch confluence with structure/SESSION levels.

Retracements

• Common levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%.
• Use to frame pullbacks within trends; combine with MAs/structure.

Extensions

• Targets beyond the swing: 127.2%, 161.8%, 261.8%.

Projections

• Project next swings using prior leg proportions for symmetry analysis.

Indicators are most effective when they confirm a price action thesis built from structure, sessions, liquidity, and market context.

Workflow examples

• Trend pullback: Identify HH/HL and rising MAs → wait for pullback to 20/50 EMA → bullish candle pattern → RSI reclaims 50 → enter with ATR stop.
• Range fade: Define range S/R → Stochastic extreme + reversal wick at edge → target mid/other side; avoid if ADX rising.
• Breakout from squeeze: Bollinger Squeeze + volume expansion + MACD histogram turn → enter on close beyond level; manage with ATR.

Scalping / Intraday

• MAs: 9/20 EMA for bias and pullbacks; 50 EMA as dynamic context.
• RSI: 7–10 period for responsiveness; watch 50‑line flips.
• MACD: Faster settings (e.g., 8/17/5) for quicker momentum cues.
• ATR: Volatility‑scaled stops (0.8–1.5× ATR on chosen TF).

Swing trading

• MAs: 20/50 EMA for structure; 200 SMA for regime.
• RSI: 14 default; divergences and 50‑line behavior.
• MACD: 12/26/9 default; prefer histogram turns near zero in trend.
• ATR: 1.5–3× ATR stops beyond swing structure.

Position trading

• MAs: 50/200 SMA for long‑term bias and transitions.
• ADX/DMI: Engage trend tactics when ADX > ~20–25.
• Fibonacci: Use retracement and extension confluence for adds/targets.

• Confirm with price: Structure + trend filter + timing; skip signals against HTF bias.
• Avoid noise: Low-liquidity sessions, conflicting tools, signals inside chop.
• Rule: Price no + indicator yes = pass; price yes + indicator yes = consider.

• Focus: Flows, liquidity, execution, risk; indicators are secondary lenses.
• Use cases: Regime, timing, monitoring—not prediction.
• Process: Thesis → plan → execute → manage → review.

• Paralysis from conflicting tools.
• Curve-fitting past data.
• Missing structure/liquidity cues.

• Using overbought/oversold as automatic reversal signals during strong trends.
• Ignoring higher‑timeframe regime and structure when taking lower‑timeframe signals.
• Fixed‑pip stops that ignore volatility and nearby structure.
• Constantly changing settings and tools—no stable process or review loop.

Trend continuation (pullback buy)

• Price above rising 20/50 EMA; ADX > 20; higher‑timeframe bullish.
• Pullback to EMA + bullish rejection; RSI holds 40–50 and turns up.
• Stop 1.5–2.0× ATR beyond structure; scale at Fib extensions.

Range mean‑reversion

• Flat MAs, ADX < 20; clear horizontal S/R.
• Stochastic overbought at range high with rejection wick.
• Target the mid or opposite edge; invalidate on clean breakout.

Breakout from squeeze

• Bollinger Band Squeeze + volume expansion.
• MACD histogram flips; close through structure level.
• ATR‑scaled stop; trail with MA/structure.

Indicators turn price/volume into structured signals for trend, momentum, and volatility. Edge comes from:

• Diagnosing regime first (trend vs range; volatility level).
• Using a small, complementary set (trend filter + timing + risk).
• Integrating with price action, sessions, and liquidity.
• Risk management via ATR and structure; consistent review and refinement.

Keep it simple, testable, and disciplined. Indicators are lenses—price action is the story.