Technical Indicators: How to Use On-Chart Technical Indicators

Master on-chart technical indicators to elevate your trading strategy with precise insights tailored for your specific needs and goals.

Technical Indicators: How to Use On-Chart Technical Indicators

When you dive into the world of active trading, you quickly discover the importance of technical indicators. Unlike more subjective tools like chart patterns and trend lines, technical indicators are rooted in precise numerical data. This quantifiable nature makes them invaluable, as they provide concrete figures that can help you make informed trading decisions.

Technical indicators stand out because they offer the clarity and precision that subjective tools sometimes lack. Numbers don’t lie, and by relying on data-driven indicators, you can navigate the complexities of the market with greater confidence. These numeric-driven insights serve as the backbone for many traders who seek to systematically decode market behaviors.

Moreover, one of the fascinating aspects of technical indicators is their application in automating trading systems. By leveraging these indicators, you can develop automated strategies that react swiftly to market changes. This not only streamlines your trading process but can also give you a strategic edge by executing trades based on established criteria without allowing human emotions to interfere.

The purpose of this guide is to offer you a comprehensive understanding of various technical indicators and demonstrate how you can integrate them into a cohesive and effective trading strategy. Whether you are a novice trader or someone looking to refine their techniques, this guide aims to enhance your trading acumen.

Technical indicators can be categorized into four primary groups: trend, momentum, volatility, and volume. These categories encompass a wide range of tools, each serving a specific purpose in analyzing market movements. The subsequent sections of this guide will delve deeper into each category, providing you with detailed insights into their functionalities and applications.

Understanding the variety of technical indicators is crucial for developing a robust trading strategy. The four major types of technical indicators are trend indicators, momentum indicators, volatility indicators, and volume indicators. Each of these categories plays a distinct role in helping you analyze and anticipate market movements. Let’s delve into each one in detail.

Trend Indicators

Trend indicators help you identify the direction in which a security is moving. These indicators allow you to see whether a market is in an uptrend, downtrend, or moving sideways. Recognizing these trends early can be the difference between a profitable trade and a losing one.

Two common examples of trend indicators are moving averages and Moving Average Convergence Divergence (MACD). Moving averages smooth out price data to create a single flowing line, making it easier to spot trends. MACD, on the other hand, shows the relationship between two moving averages and is particularly useful in identifying changes in the strength, direction, momentum, and duration of a trend.

Imagine you’re trading a stock that has recently been volatile. By applying a moving average, you can filter out the noise and identify a clearer picture of the stock’s directional movement. If the moving average is trending upward, it may signal a good buying opportunity. Conversely, if MACD lines cross over, it may indicate that a current trend is losing strength, providing you with a potential exit signal.

Momentum Indicators

Momentum indicators measure the speed at which prices are moving. They help you understand whether an asset is being overbought or oversold, which can indicate potential reversal points.

Popular momentum indicators include the Relative Strength Index (RSI) and stochastics. RSI measures the magnitude of recent price changes to evaluate overbought or oversold conditions, guiding you on when to buy or sell. Stochastics, on the other hand, compare a particular closing price of a security to its price range over a specific period, giving you insight into potential reversals.

For example, if the RSI of a stock exceeds 70, it might be considered overbought, suggesting a selling opportunity. Conversely, an RSI below 30 could indicate that the stock is oversold and might experience an upward reversal soon. This helps you time your entries and exits more effectively.

Volatility Indicators

Volatility indicators show the extent of price fluctuations over time. These are crucial for understanding the risks involved in trading a particular asset.

Two widely-used volatility indicators are Bollinger Bands and Average True Range (ATR). Bollinger Bands consist of a middle band (a moving average) and two outer bands that represent standard deviations above and below. The bands expand and contract based on market volatility. ATR measures the degree of price volatility, giving you a sense of how much an asset might move during a particular period.

If you notice that the Bollinger Bands are tightening around the price, it may indicate a period of low volatility, which often precedes significant price movements. Conversely, if the ATR is increasing, this suggests higher volatility, and you might want to adjust your positions to manage risk better.

Volume Indicators

Volume indicators confirm the strength of price movements by analyzing trading volume. Essentially, they tell you how much trading activity is happening with the security, making it easier to validate trends or identify potential reversals.

Examples of volume indicators include On-Balance Volume (OBV) and Chaikin Money Flow. OBV adds and subtracts volume based on the direction of price movement, helping you understand whether volume is supporting a price trend. Chaikin Money Flow measures the accumulation and distribution of a security over a specified period, giving you insights into buying and selling pressure.

For instance, if a stock’s price is increasing but the OBV is decreasing, it might indicate that the price uptrend lacks volume support and could be unsustainable. This helps you avoid false breakouts and invest in more robust opportunities.

Understanding the specific functionalities of each type of indicator is essential to avoid chaotic chart setups and to create a cohesive trading strategy. Overloading your charts with too many indicators can make analysis cumbersome and confusing. Instead, aim to select the right combination of indicators tailored to your trading objectives.

When choosing the right set of indicators, consider your trading style, risk tolerance, and market conditions. A day trader might prioritize momentum and volume indicators, while a long-term investor might lean more towards trend and volatility indicators. By combining these tools thoughtfully, you can build a more nuanced and effective trading strategy that aligns with your financial goals.

Combining Technical Indicators for a Cohesive Trading Strategy

Combining technical indicators into a cohesive trading strategy can vastly improve your ability to identify profitable trading opportunities.

Let’s break down a strategy that integrates RSI, MACD, and moving averages, and see how these indicators work together to signal trend reversals and confirm trades.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements.

It oscillates between 0 and 100, with readings above 70 indicating overbought conditions and readings below 30 indicating oversold conditions.

MACD (Moving Average Convergence Divergence)

The MACD, or Moving Average Convergence Divergence, is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.

The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA, and the signal line is the 9-period EMA of the MACD line.

Moving Averages

Moving averages smooth out price data to identify the direction of the trend.

A common strategy is to use a short-term moving average, such as the 50-day MA, alongside a long-term moving average, such as the 200-day MA.

Here’s how you could use these indicators together:

  1. Use the RSI to identify potential overbought or oversold conditions. This gives you a preliminary idea of possible trend reversals.

  2. Look at the MACD to confirm the strength and direction of the trend. A bullish crossover occurs when the MACD line crosses above the signal line, and a bearish crossover occurs when the MACD line crosses below the signal line.

  3. Monitor the moving averages for a crossover. For example, a buy signal is generated when the 50-day MA crosses above the 200-day MA (golden cross), and a sell signal is suggested when the 50-day MA crosses below the 200-day MA (death cross).

Scenario Analysis

Assume the price of a stock has been in a downtrend, but recently the RSI moved below 30, signaling it might be oversold.

You then notice on the MACD that the MACD line has crossed above the signal line, suggesting a potential move higher.

Finally, the 50-day MA starts to move closer to the 200-day MA. When it does cross above, you have a clear buy signal.

Conversely, if the RSI climbs above 70, the MACD indicates a bearish crossover, and the 50-day MA drops below the 200-day MA, you get a sell signal.

Using Envelopes and Stochastics with Trendlines


Envelopes are bands plotted at a fixed percentage above and below a moving average.

They help identify overbought and oversold conditions when prices reach the upper or lower envelope.


Stochastics is another momentum indicator that compares a security’s closing price to its price range over a certain period.

It oscillates between 0 and 100, with readings above 80 indicating overbought conditions and readings below 20 indicating oversold conditions.


Trendlines are straight lines drawn on a chart, connecting at least two price points, to identify the trend direction.

Here’s how to use them:

  1. Plot envelopes around a simple moving average to identify overbought and oversold levels.

  2. Use stochastics to confirm these levels. A crossover in the overbought or oversold region can signal a reversal in trend.

  3. Draw trendlines connecting recent highs and lows to identify support and resistance levels.

Scenario Analysis

Suppose a stock is trading near its upper envelope band, and the stochastic indicator shows a reading above 80 with a bearish crossover.

This suggests the stock is overbought. You draw a trendline connecting recent highs to identify resistance levels.

When the price touches this trendline and starts to reverse, it provides a sell signal.

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Risk Management

To manage risk, set stop-loss points slightly above the resistance level in this sell scenario.

For buying, if the price nears the lower envelope band and the stochastic indicator shows a reading below 20 with a bullish crossover, place a stop-loss below the recent low.

Volatility indicators like the Average True Range (ATR) can help you determine appropriate stop-loss and take-profit points by providing a measure of the market’s daily price movement.

Set your stop-loss points using a multiple of the ATR to account for market noise and avoid being stopped out prematurely.

Volume indicators, such as On-Balance Volume (OBV), can confirm the strength of buy and sell signals.

Rising OBV indicates strong buying pressure, making a bullish signal more reliable, while falling OBV suggests strong selling pressure, reinforcing bearish signals.

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Avoiding False Signals

One common challenge you may face is the risk of false signals.

To mitigate this, it’s crucial to use multiple indicators to confirm each signal. Avoid trading solely based on one indicator.

Additionally, always use proper risk management techniques to protect your capital, such as setting stop-losses and only risking a small percentage of your trading account on each trade.

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Mastering Technical Indicators

In summary, mastering technical indicators and integrating them into a cohesive trading strategy requires practice and continuous refinement.

By combining tools like RSI, MACD, moving averages, envelopes, stochastics, and trendlines, you’ll be better equipped to identify trends, reversals, and trading opportunities.

Continue to adapt your strategies to evolving market conditions to maintain a competitive edge.

🧠 Thinking Deeper

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