Technical Indicators: How to Use On-Chart Technical Indicators
Technical indicators are among the most powerful quantitative tools available to active traders. Unlike subjective tools like chart patterns and trend lines, technical indicators provide concrete numeric data for making trade decisions. Many traders even use these indicators to build fully automated trading systems.
This guide covers the different types of technical indicators and how to combine them into effective trading strategies.
The Four Types of Technical Indicators
Thousands of technical indicators have been developed over the years. While all are computed using price and volume data, they can be combined in countless ways to analyze potential price movements.
Breaking indicators into categories makes them easier to understand and apply:
Trend Indicators
Trend indicators reveal the direction a security is moving—higher, lower, or sideways. They help you align trades with the prevailing trend rather than fighting against it.
Common trend indicators:
- Moving averages (simple, exponential, weighted)
- Moving Average Convergence-Divergence (MACD)
- Average Directional Index (ADX)
- Parabolic SAR
Momentum Indicators
Momentum indicators measure the speed and strength of price movement. They help determine whether a trend has staying power or is running out of steam.
Common momentum indicators:
- Relative Strength Index (RSI)
- Stochastics
- Commodity Channel Index (CCI)
- Rate of Change (ROC)
Volatility Indicators
Volatility indicators show how much a security’s price is fluctuating. They’re essential for position sizing, setting stop-losses, and identifying potential breakout opportunities.
Common volatility indicators:
- Bollinger Bands
- Average True Range (ATR)
- Keltner Channels
- Standard Deviation
Volume Indicators
Volume indicators analyze trading activity behind price movements. They serve primarily as confirmation tools—validating whether price moves have the participation needed to continue.
Common volume indicators:
- On-Balance Volume (OBV)
- Chaikin Money Flow
- Volume Weighted Average Price (VWAP)
- Accumulation/Distribution Line
How to Combine Technical Indicators Effectively
Adding too many indicators to a chart creates confusion rather than clarity. Focus on mastering a handful of indicators rather than superficially using many.
The most effective approach: select one or two indicators from different categories to create a balanced trading strategy.
A Framework for Combining Indicators
Step 1: Identify the trend using a trend indicator like MACD or moving averages.
Step 2: Confirm momentum with RSI or stochastics to ensure the trend has strength.
Step 3: Set risk parameters using volatility indicators like Bollinger Bands or ATR for stop-loss and take-profit levels.
Step 4: Validate with volume using OBV or similar indicators to confirm institutional participation.
Key Principles
- Trend indicators determine trade direction (long or short)
- Momentum indicators assess whether trends will continue or reverse
- Volatility indicators define stop-loss and take-profit points
- Volume indicators confirm other signals
For currency and futures traders, also monitor economic indicators—quantitative measures based on economic data like GDP, inflation, and employment figures.
Practical Indicator Combinations
Combination 1: RSI, MACD & Moving Averages
This classic combination identifies trend reversals with precision:
- Entry signals: Look for MACD crossovers near key moving averages
- Exit signals: Watch for RSI approaching overbought (above 70) or oversold (below 30) levels
- Trend confirmation: Use moving average alignment to confirm overall direction
This approach works well for swing trading across multiple timeframes.
Combination 2: Envelopes, Stochastics & Trendlines
This combination excels in range-bound markets:
- Buy signals: Stochastics reach oversold levels while price touches the lower envelope band
- Sell signals: Stochastics reach overbought levels while price touches the upper envelope band
- Trend filter: Use trendlines to avoid counter-trend trades
This setup is particularly effective for mean-reversion strategies.
Combination 3: ADX, ATR & OBV
This combination helps traders identify strong trending moves:
- Entry filter: ADX above 25 confirms a strong trend
- Position sizing: ATR determines stop-loss distance and position size
- Confirmation: Rising OBV confirms institutional participation
This approach works best for trend-following strategies in volatile markets.
Common Mistakes to Avoid
Using redundant indicators: Combining RSI and Stochastics provides little additional insight since both measure momentum. Choose one from each category.
Ignoring the larger timeframe: Always check higher timeframes to ensure your trades align with the broader trend.
Over-optimizing: Indicators should provide general guidance, not perfect signals. If your system requires specific settings to work, it’s likely over-fitted.
Neglecting price action: Indicators derive from price. Sometimes the clearest signal comes from the price chart itself.
The Bottom Line
Technical indicators provide quantitative measures of trend direction, momentum, volatility, and volume that remove guesswork from trading decisions. By understanding how different indicator types work and combining them thoughtfully, you can build robust trading systems that improve risk-adjusted returns over time.
Start with one indicator from each major category, master how they work, and only then consider adding complexity. The most successful traders often use surprisingly simple indicator combinations—their edge comes from disciplined application, not indicator sophistication.
To put these strategies into practice, you’ll need a professional charting platform. Explore our top stock market analysis tools to find platforms that support the indicator combinations covered in this guide.