Technical Analysis Indicators
Apply moving averages, RSI, and MACD to real market data
⏱️ 26 min⚡ 8 interactions
1. Reading the Market's Language
Technical analysis is like learning to read the market's body language. While fundamental analysts study company financials, technical analysts study price patterns, trends, and momentum. The charts tell stories of fear, greed, support, and resistance.
📊 Core Concept
Technical indicators are mathematical calculations based on price and volume data. They help identify trends, momentum, volatility, and potential reversal points. The four main categories are: Trend indicators (moving averages), Momentum oscillators (RSI, MACD), Volatility measures (Bollinger Bands), and Volume indicators.
🎓 The Three Pillars of Technical Analysis
Foundation: Why Technical Analysis Works
Technical analysis rests on three core assumptions that, while debated by academics, have guided traders for over a century. Understanding these principles helps you see WHY chart patterns and indicators predict future prices.
1️⃣ "Price Discounts Everything"
ALL information—earnings, news, sentiment, insider knowledge, macroeconomic data—is ALREADY reflected in the price. You don't need to read financial statements or analyze Fed policy. Just study the chart!
Example: Apple announces record earnings
• Stock drops 5% after announcement
Fundamentalist: "Confused—earnings were great!"
Technician: "Price was already at resistance. Chart said sell."
The chart shows what the market THINKS, not what "should" happen. Price is truth.
2️⃣ "History Repeats Itself"
Market psychology is constant. Human emotions—fear, greed, panic, euphoria—create recognizable patterns. The same head & shoulders, double tops, and support/resistance patterns that worked in 1920s work today (and will work in 2050).
Why patterns repeat:
• Humans panic at the same chart shapes (fear of loss)
• FOMO kicks in at breakouts (greed for gains)
• Round numbers act as psychological barriers ($100, $1,000)
Result: $AAPL in 2024 behaves like $IBM in 1984!
This is why 100-year-old patterns (Charles Dow, 1900s) still appear on modern crypto charts. Human psychology is the one constant.
3️⃣ "Prices Move in Trends"
Trends persist until a clear reversal signal appears. This is Newton's first law applied to markets: "An object in motion stays in motion." Once a trend starts, it's more likely to CONTINUE than reverse. This is the foundation of trend-following strategies.
Trend statistics (S&P 500 historical):
• Uptrends last 5-7 years on average
• Downtrends last 1-2 years (shorter but steeper)
• 70% of the time, yesterday's trend = tomorrow's trend
"The trend is your friend... until the end!"
This is why "buy the dip" works in bull markets but destroys portfolios in bear markets. Identify the trend first, THEN trade with it.
The debate: Academics (Efficient Market Hypothesis) say technical analysis is astrology—prices are random walks. Yet billions trade daily using charts! The truth: Markets are MOSTLY efficient (hard to beat) but have EXPLOITABLE inefficiencies due to behavioral biases (herding, loss aversion, recency bias). Technical analysis works because humans are predictably irrational.
Chart Types: Which One to Use?
Charts visualize price data, but how you display it affects what patterns you see. Three main chart types dominate: line (simplest), bar (OHLC detail), and candlestick (visual pattern recognition). Most pros use candlesticks for their intuitive color coding.
📈 Line Chart
• Connects closing prices
• Pros: Clean, trend-spotting
• Cons: Ignores intraday action
Best for: Long-term investing, macro trends, beginners
📊 Bar Chart (OHLC)
• Shows Open-High-Low-Close
• Pros: Full price range
• Cons: Harder to read patterns
Best for: Precise entries/exits, volume analysis
🕯️ Candlestick Chart
• OHLC + visual patterns
• Pros: Pattern recognition!
• Cons: Can be noisy
✓ Industry standard
Best for: Day trading, swing trading, pattern recognition
Candlestick Anatomy:
Green/White candle: Close > Open (bullish day)
• Body = distance from open to close
• Upper wick = high - close
• Lower wick = open - low
Red/Black candle: Close < Open (bearish day)
• Body = distance from close to open
• Upper wick = high - open
• Lower wick = close - low
Trend Identification: The Most Important Skill
"The trend is your friend" is Wall Street's oldest cliché because it's TRUE. 80% of trading profits come from correctly identifying the trend and trading WITH it. Against the trend? That's how accounts blow up. Here's how to spot trends systematically.
📈 Uptrend (Bull Market)
Definition: Series of higher highs (HH) and higher lows (HL)
Low $100 → High $120 → Low $110 (HL!) → High $130 (HH!) → Uptrend confirmed ✓
Trading rules:
• ✅ Buy dips to support (higher lows)
• ✅ Hold winners, let profits run
• ❌ DON'T short! (shorting an uptrend = fighting the Fed)
• ⚠️ Exit signal: Lower low (LL) breaks the pattern → trend reversal
Real example: $TSLA 2019-2021 went $40 → $400 → $300 → $900. Every "crash" to higher low was a buy opportunity!
📉 Downtrend (Bear Market)
Definition: Series of lower highs (LH) and lower lows (LL)
High $100 → Low $80 → High $90 (LH!) → Low $70 (LL!) → Downtrend confirmed ✓
Trading rules:
• ✅ Short rallies to resistance (lower highs)
• ✅ Cut losers quickly, don't "hope"
• ❌ DON'T buy dips! (catching falling knives)
• ⚠️ Exit signal: Higher high (HH) breaks pattern → trend reversal
Real example: $ARKK 2021-2022 went $150 → $100 → $120 → $70 → $50. Every "bounce" was a selling opportunity!
➡️ Sideways (Ranging/Consolidation)
Definition: Price bounces between horizontal support and resistance
Support $95 → Resistance $105 → bounces 5+ times → Range = $10
Trading rules:
• ✅ Buy at support, sell at resistance (range trading)
• ✅ Wait for breakout confirmation before trend trading
• ❌ DON'T chase breakouts early (often false signals)
• ⚠️ Exit range: Breakout above resistance (bullish) or below support (bearish)
Real example: $SPY often ranges for 3-6 months between major trends. Range traders make steady profits while trend followers wait patiently.
Pro tip: Markets spend ~40% in uptrends, ~20% in downtrends, and ~40% ranging. Most retail traders fail because they trend-trade in ranges (whipsawed) or range-trade in trends (miss big moves). Identify the regime FIRST, then apply the right strategy. Use 200-day moving average as quick filter: Price above = uptrend bias, price below = downtrend bias, price at MA = ranging.
Support & Resistance: The Battlegrounds
Support is a price level where buying pressure overwhelms selling (floor). Resistance is where selling overwhelms buying (ceiling). These levels act like magnets—price gravitates toward them and often reverses. Understanding support/resistance is the foundation for entries, exits, and stop-losses.
How Support/Resistance Forms:
🛡️ Support: The Floor
Psychology: "I wish I bought at $100 last month! If it hits $100 again, I'm buying."
Stock falls to $100 → bounces (buyers step in)
Falls to $100 again → bounces again
$100 becomes support! (proven 2+ times)
What happens:
• If holds: Buyers gain confidence, uptrend resumes
• If breaks: Sellers panic, support becomes resistance!
🚧 Resistance: The Ceiling
Psychology: "I bought at $200 and it tanked! If it hits $200 again, I'm selling to break even."
Stock rises to $200 → rejected (sellers unload)
Rises to $200 again → rejected again
$200 becomes resistance! (proven 2+ times)
What happens:
• If holds: Sellers stay in control, downtrend continues
• If breaks: FOMO kicks in, resistance becomes support!
Key Insights:
• Role reversal: Broken support becomes new resistance (and vice versa). Example: $AAPL breaks through $150 resistance → rallies to $170 → drops back to $150 → bounces! (Now support)
• Round numbers: $50, $100, $1,000 act as psychological barriers. Why? Limit orders cluster there ("I'll sell at $100" = millions think same!)
• Multiple tests = strength: Support tested 5 times is stronger than support tested twice. But eventually, all support breaks (nothing lasts forever).
• Volume confirms validity: High-volume bounce at support = strong. Low-volume bounce = weak (likely breaks next test).
Pro traders place buy orders just ABOVE support (not at it—avoid fakeout wicks) and sell orders just BELOW resistance. Stop-losses go just below support for longs, just above resistance for shorts. This is Technical Analysis 101!
📈 Interactive: Market Simulator
3x
50 Days$114.0850 candles
2. Moving Averages: Following the Trend
🎓 Moving Averages: Simple Yet Powerful
The Mathematics: SMA vs EMA
Moving averages eliminate daily volatility by averaging prices over a period. But which average you use—simple (SMA) or exponential (EMA)—determines how quickly you react to price changes. Most pros prefer EMA for its responsiveness.
📊 Simple Moving Average (SMA)
Formula:
SMA = (P₁ + P₂ + ... + Pₙ) / n
Where:
• P = price (usually close)
• n = number of periods
Example: 5-day SMA
Prices: $100, $102, $101, $103, $104
SMA = (100+102+101+103+104)/5 = $102
Next day: $106 (new), $100 (drops off)
SMA = (102+101+103+104+106)/5 = $103.20
Strengths:
• Simple to calculate (just average)
• Smooth, stable line (less noise)
• All data points equal weight (democratic)
Weaknesses:
• Laggy (slow to react to new prices)
• Old data same weight as today's
• Misses trend changes early
⚡ Exponential Moving Average (EMA)
Formula:
EMA = Price × α + EMA_prev × (1 - α)
α (multiplier) = 2 / (n + 1)
Where:
• α = smoothing factor
• n = number of periods
• EMA_prev = yesterday's EMA
Example: 5-day EMA
α = 2/(5+1) = 0.333 (33.3% weight)
Yesterday's EMA = $102
Today's price = $106
EMA = $106 × 0.333 + $102 × 0.667
= $35.33 + $68.07 = $103.40
Notice: EMA moved to $103.40 (faster)
vs SMA only $103.20 (slower)
Strengths:
• Responsive (recent prices weighted more)
• Catches trend changes earlier
• Preferred by short-term traders
Weaknesses:
• More whipsaws (false signals)
• Complex calculation
• Can overreact to spikes
Which to use? Long-term investors prefer SMA (50-day, 200-day) for stability. Day traders prefer EMA (9, 12, 26) for speed. The MACD indicator uses EMAs exclusively. Most charting platforms default to SMA but allow switching. Try both on your timeframe!
Crossover Strategies: The Holy Grail (Maybe?)
Moving average crossovers are the most famous technical signals in history. When a fast MA crosses above a slow MA, it's bullish (trend reversing up). Cross below? Bearish (trend reversing down). The two most watched: Golden Cross and Death Cross.
✝️ Golden Cross: The Bullish Signal
Definition: 50-day MA crosses ABOVE 200-day MA
• Bearish phase: 50-day below 200-day (months of decline)
• Bottoming: 50-day starts flattening (selling exhaustion)
• Golden Cross: 50-day crosses above 200-day! 🚀
Signal: Long-term trend reversing from bear to bull
Action: Buy stocks, increase portfolio exposure
Historical accuracy:
• S&P 500: 70% win rate (Golden Cross → 12-month gain)
• Average gain: +15% in following year
• False signals: ~30% (price whipsaws back down)
Famous examples: $SPY Golden Cross March 2009 (start of 11-year bull run!), Bitcoin Golden Cross April 2019 ($4k → $14k in 3 months), $AAPL Golden Cross May 2023 ($160 → $200 rally).
💀 Death Cross: The Bearish Signal
Definition: 50-day MA crosses BELOW 200-day MA
• Bullish phase: 50-day above 200-day (months of gains)
• Topping: 50-day starts rolling over (buying exhaustion)
• Death Cross: 50-day crosses below 200-day! 📉
Signal: Long-term trend reversing from bull to bear
Action: Sell stocks, reduce exposure, raise cash
Historical accuracy:
• S&P 500: 65% win rate (Death Cross → 12-month loss)
• Average loss: -8% in following year
• False signals: ~35% (price recovers, new bull run)
Famous examples: $SPY Death Cross Dec 2007 (Great Financial Crisis, -57% drop!), Death Cross March 2022 (but false signal—$SPY bottomed Oct 2022 and rallied). Death Cross less reliable than Golden Cross (easier to predict bull markets than bear markets).
⚡ Fast MA Crossovers: Short-Term Signals
Common pairs: 9/21, 12/26, 20/50 (days or minutes)
• Bullish: Fast MA crosses above slow MA → BUY signal
• Bearish: Fast MA crosses below slow MA → SELL signal
• Strength: Quicker signals (good for swing trading)
• Weakness: More whipsaws (30-40% false signals)
Example: 12/26 EMA crossover (used in MACD!)
$NVDA trending: 12 crosses above 26 → +15% in 3 weeks
$NVDA ranging: 12 crosses above 26 → -2% whipsaw
Pro tip: Only trade crossovers in trending markets!
Reality check: Crossovers are LAGGING indicators (signal appears after trend already changed). Golden Cross appears ~2-3 months after the bottom (you miss the initial 20-30% bounce). Death Cross appears ~2-3 months after the top (you give back gains). Better use: Confirmation tool ("Should I still be bullish? Yes, Golden Cross just formed!") rather than entry/exit trigger. Combine with momentum indicators (RSI, MACD) for better timing.
MAs as Dynamic Support & Resistance
Moving averages don't just signal trends—they act as price magnets. In uptrends, price bounces off MAs (support). In downtrends, price gets rejected at MAs (resistance). This behavior creates repeatable trade setups used by institutions and retail alike.
📈 Uptrend: MAs as Support
$AAPL uptrend: Price $180, 50-day MA $165
• Pullback: Price drops to $166 (touches 50-day)
• Bounce: Buyers defend MA, price rallies to $190
• Repeat: Next pullback to $175 (50-day now $170)
• Bounce again! Pattern reliable until break
Trading strategy: "Buy the dip"
1. Wait for price to pull back to 20 or 50-day MA
2. Confirm MA is rising (uptrend intact)
3. Enter when price bounces off MA (candlestick reversal pattern helps)
4. Stop-loss below MA (if breaks, trend may be over)
5. Target: Previous high or resistance
Why it works: Traders place buy orders at MAs ("I'll buy $AAPL if it dips to the 50-day"). Self-fulfilling prophecy—enough buy orders create the bounce!
📉 Downtrend: MAs as Resistance
$ARKK downtrend: Price $60, 50-day MA $75
• Rally: Price bounces to $74 (hits 50-day MA)
• Rejection: Sellers defend MA, price drops to $55
• Repeat: Next rally to $68 (50-day now $70)
• Rejection again! Pattern reliable until break
Trading strategy: "Fade the rally"
1. Wait for price to rally to 20 or 50-day MA
2. Confirm MA is declining (downtrend intact)
3. Enter short when price rejected at MA
4. Stop-loss above MA (if breaks, trend may reverse)
5. Target: Previous low or support
Why it works: Bagholders place sell orders at MAs ("If it gets back to my entry, I'm selling to break even!"). Their selling pressure creates the rejection. Brutal but consistent.
🎯 Common MA Periods & Uses
20-day MA: Short-term trend, swing trading (2-3 week holds), most volatile MA
50-day MA: Intermediate trend, position trading (1-3 month holds), most popular MA
200-day MA: Long-term trend, investing (1+ year holds), bull/bear dividing line
9 & 21-day EMA: Day/swing trading, faster signals, more whipsaws
Pro setup: Plot 20, 50, and 200-day MAs simultaneously. Price above all three = strong bull (aggressive), between 50 and 200 = neutral (cautious), below all three = strong bear (defensive or short). Distance between MAs shows trend strength (wide = momentum, narrow = consolidation).
Risk management: When price breaks below key MA (50 or 200-day) in uptrend, don't "buy the dip" immediately. First break often retests as resistance (role reversal). Wait for price to reclaim MA and hold for 2-3 days, THEN buy the next dip. Conversely, in downtrend, first break above MA often rejects back down—don't chase! Wait for retest confirmation. Patience beats FOMO.
📊 Interactive: Moving Average Crossover
10 days
20 days
Price
Short MA (10)
Long MA (20)
💡 Golden Cross: When the short MA crosses above the long MA, it's a bullish signal. Death Cross: When it crosses below, it's bearish.
🎯 Interactive: Trading Signals
Day 41
$112.89
HOLD
Day 42
$112.38
HOLD
Day 43
$112.44
HOLD
Day 44
$113.63
HOLD
Day 45
$115.15
HOLD
Day 46
$114.09
HOLD
Day 47
$114.05
HOLD
Day 48
$114.69
HOLD
Day 49
$114.68
HOLD
Day 50
$114.08
HOLD
3. RSI: Measuring Momentum
🎓 RSI: The Momentum Oscillator
The RSI Formula: Simple but Powerful
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of price changes. Developed by J. Welles Wilder in 1978, it remains one of the most widely used indicators. RSI ranges from 0-100, making it easy to interpret at a glance.
Step-by-Step RSI Calculation:
1. Calculate price changes:
• Gain = Close - Previous Close (if positive, else 0)
• Loss = Previous Close - Close (if negative, else 0)
2. Average gains and losses (14 periods default):
• Avg Gain = Sum of gains / 14
• Avg Loss = Sum of losses / 14
3. Calculate Relative Strength (RS):
• RS = Avg Gain / Avg Loss
4. Calculate RSI:
• RSI = 100 - [100 / (1 + RS)]
Concrete Example (14-day RSI):
Last 14 days: 8 up days (avg gain $2.00), 6 down days (avg loss $1.50)
RS = $2.00 / $1.50 = 1.33
RSI = 100 - [100 / (1 + 1.33)]
= 100 - [100 / 2.33]
= 100 - 42.92
= 57.08 (Neutral momentum)
Why 14 periods? Wilder tested many periods and found 14 balanced responsiveness with stability. Shorter periods (7, 9) = more sensitive (good for day trading). Longer periods (21, 28) = smoother (less false signals). Most platforms default to 14, making it the industry standard.
Overbought/Oversold: The Basic Signals
RSI's most famous use: identifying overbought (>70) and oversold (<30) conditions. But here's the truth pros know: "Overbought" doesn't mean "sell immediately," and "oversold" doesn't mean "buy immediately." Context matters!
⬇️ Oversold (RSI < 30)
Interpretation: "Selling exhaustion, bounce likely"
• Recent losses excessive
• Downward momentum fading
• Potential short-term rally
⚠️ Caution:
RSI can stay <30 for WEEKS in strong downtrends! Don't catch falling knives.
➡️ Neutral (RSI 30-70)
Interpretation: "Balanced, no extreme"
• Normal market conditions
• No clear momentum extreme
• Wait for signal
💡 Strategy:
Most trading happens here. Look for RSI trend + divergences, not levels.
⬆️ Overbought (RSI > 70)
Interpretation: "Buying exhaustion, pullback likely"
• Recent gains excessive
• Upward momentum fading
• Potential short-term dip
⚠️ Caution:
RSI can stay >70 for MONTHS in strong uptrends! Don't short strength.
🎯 The Pro Approach: Trend-Adjusted Thresholds
Bull Market (uptrend):
• Raise oversold to 40 (buy dips at RSI 40)
• Ignore overbought >70 (strong trends run hot)
Example: $AAPL 2023 stayed RSI 70-80 for months!
Bear Market (downtrend):
• Lower overbought to 60 (sell rallies at RSI 60)
• Ignore oversold <30 (weak trends stay cold)
Example: $ARKK 2022 stayed RSI 20-30 for months!
Divergence: The Most Powerful RSI Signal
Divergence occurs when price and RSI move in opposite directions. This indicates weakening momentum and often precedes trend reversals. Many pros consider divergence MORE reliable than overbought/oversold levels. There are four types to watch.
📈 Bullish Divergence (Reversal Up)
Price: Lower low | RSI: Higher low → Momentum improving!
Scenario: $SPY downtrend
• First low: Price $380, RSI 25
• Second low: Price $370 (lower!), RSI 32 (higher!)
→ Divergence! Price made lower low, but RSI refused
→ Sellers losing strength despite lower prices
→ Likely bottom forming, reversal up imminent
Trading strategy:
1. Wait for confirmation (price breaks above short-term resistance)
2. Enter long on breakout with stop below recent low
3. Target previous swing high or resistance
4. Win rate: ~65-70% (higher in oversold zones RSI <30)
Real example: Bitcoin Feb 2018 made lower low at $6k (RSI 30), then lower low at $5.9k (RSI 35). Bullish divergence predicted the rally to $9k!
📉 Bearish Divergence (Reversal Down)
Price: Higher high | RSI: Lower high → Momentum weakening!
Scenario: $TSLA uptrend
• First high: Price $280, RSI 78
• Second high: Price $290 (higher!), RSI 72 (lower!)
→ Divergence! Price made higher high, but RSI refused
→ Buyers losing strength despite higher prices
→ Likely top forming, reversal down imminent
Trading strategy:
1. Wait for confirmation (price breaks below short-term support)
2. Enter short on breakdown with stop above recent high
3. Target previous swing low or support
4. Win rate: ~60-65% (higher in overbought zones RSI >70)
Real example: $SPY Nov 2021 made higher high at $475 (RSI 71), then higher high at $479 (RSI 67). Bearish divergence predicted the -25% crash to $360!
🔄 Hidden Bullish Divergence (Trend Continuation)
Price: Higher low | RSI: Lower low → Uptrend pullback healthy!
During uptrend: Price pulls back but holds above previous low
Meanwhile: RSI makes lower low (momentum reset)
→ Hidden divergence = continuation signal!
→ Uptrend intact, momentum recharging for next leg up
Hidden divergences are LESS reliable than regular divergences (~55% win rate) but useful for trend confirmation. If you're in a winning trade, hidden bullish divergence says "stay long!"
🔄 Hidden Bearish Divergence (Trend Continuation)
Price: Lower high | RSI: Higher high → Downtrend bounce weak!
During downtrend: Price bounces but fails below previous high
Meanwhile: RSI makes higher high (dead cat bounce)
→ Hidden divergence = continuation signal!
→ Downtrend intact, weak bounce before next leg down
Hidden bearish divergence tells you: "Don't buy the bounce—downtrend will resume!" Useful in bear markets to avoid catching knives. Exit longs, consider shorts.
Pro tip: Divergences work best on longer timeframes (daily, weekly). On 5-minute charts, divergences are everywhere and mostly noise. Also, divergence is NOT an entry signal itself—it's a warning! Wait for price confirmation (breakout/breakdown) before trading. Many false divergences resolve with price "catching up" to RSI, not RSI catching up to price.
Advanced RSI: Failure Swings & Patterns
Beyond basic levels and divergences, advanced traders use RSI patterns like failure swings, trendlines, and chart patterns. These techniques treat the RSI indicator itself as a mini-chart, applying the same technical analysis principles you'd use on price.
💥 Bullish Failure Swing
1. RSI drops below 30 (oversold)
2. RSI bounces but fails to break above 50
3. RSI pulls back but HOLDS above 30
4. RSI breaks above previous peak → BUY!
Signal: Momentum shifted from bearish to bullish. Higher probability than simple oversold.
💥 Bearish Failure Swing
1. RSI rises above 70 (overbought)
2. RSI drops but fails to break below 50
3. RSI rallies but FAILS below 70
4. RSI breaks below previous low → SELL!
Signal: Momentum shifted from bullish to bearish. Higher probability than simple overbought.
📐 RSI Trendlines:
Draw trendlines on RSI just like price! Uptrend on RSI = connect higher lows. Downtrend = connect lower highs. When RSI breaks its trendline, price often follows within 1-3 days. Example: RSI breaks down through uptrend line at RSI 50 → price reversal incoming!
📊 RSI Chart Patterns:
Head & shoulders, double tops, triangles all appear on RSI! A double top on RSI (two touches of 75) often precedes price double top. Triangle on RSI = consolidation, breakout direction predicts price move. Rare but incredibly powerful when spotted.
⚡ Interactive: RSI Oscillator
14 days
Overbought
> 70
74.9
Current RSI
Oversold
< 30
🔥
Overbought
RSI > 70 suggests selling pressure ahead
💎
Oversold
RSI < 30 suggests buying opportunity
🔍 Interactive: Divergence Spotter
Divergence occurs when price and RSI move in opposite directions, often signaling a reversal.
📈⬇️
Bullish Divergence
Price makes lower lows, but RSI makes higher lows
→ Potential upward reversal
📉⬆️
Bearish Divergence
Price makes higher highs, but RSI makes lower highs
→ Potential downward reversal
4. Advanced Indicators
🎓 MACD & Bollinger Bands: The Power Combo
MACD: Combining Trend + Momentum
The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator developed by Gerald Appel in 1979. It's unique because it combines BOTH trend (moving averages) and momentum (oscillator) in one tool. MACD is the Swiss Army knife of technical indicators.
Three Components of MACD:
1️⃣ MACD Line (The Main Signal)
Formula:
MACD Line = 12-period EMA - 26-period EMA
Example calculation:
• 12-day EMA = $105.50
• 26-day EMA = $103.20
• MACD Line = $105.50 - $103.20 = $2.30
Interpretation:
• Positive MACD = Short-term momentum > long-term (bullish)
• Negative MACD = Short-term momentum < long-term (bearish)
• Rising MACD = Momentum accelerating (getting more bullish)
• Falling MACD = Momentum decelerating (getting less bullish)
2️⃣ Signal Line (The Trigger)
Formula:
Signal Line = 9-period EMA of MACD Line
Why 9-period EMA?
• Smooths out MACD line noise
• Creates lag = crossover signals
• Standard since 1979 (industry default)
Trading signals:
• Bullish crossover: MACD crosses above Signal → BUY
• Bearish crossover: MACD crosses below Signal → SELL
Win rate: ~55-60% (better in trending markets)
3️⃣ Histogram (The Momentum Gauge)
Formula:
Histogram = MACD Line - Signal Line
Visual representation:
• Green bars = MACD above Signal (bullish)
• Red bars = MACD below Signal (bearish)
• Taller bars = Stronger momentum
• Shrinking bars = Weakening momentum
How traders use it:
• Expanding histogram: Momentum increasing (ride the trend)
• Shrinking histogram: Momentum fading (prepare to exit)
• Histogram crosses zero: Signal line crossover confirmed
Pro insight: The histogram is often more valuable than the lines! Shrinking histogram (bars getting shorter) warns of trend exhaustion BEFORE the crossover. Smart traders exit when histogram peaks, not when crossover happens (by then, you're late). Watch for "histogram divergence"—price makes new high but histogram doesn't (bearish signal).
MACD Signals & Strategy
MACD generates four main types of signals: crossovers (most common), centerline crossovers (trend confirmation), divergences (reversal warning), and overbought/oversold levels (timing tool). Understanding when to use each signal separates beginners from pros.
✅ Signal Line Crossovers (Most Popular)
Bullish Crossover:
1. MACD line crosses ABOVE signal line
2. Histogram flips from red to green
3. BUY signal → Enter long or add to position
Strength filters (avoid weak signals):
• Both MACD & Signal above zero = Strong (uptrend)
• Both below zero but rising = Weak (early reversal)
Bearish Crossover:
1. MACD line crosses BELOW signal line
2. Histogram flips from green to red
3. SELL signal → Exit long or enter short
Strength filters:
• Both MACD & Signal below zero = Strong (downtrend)
• Both above zero but falling = Weak (early reversal)
🎯 Centerline Crossovers (Trend Confirmation)
MACD crosses above zero line:
• 12 EMA now above 26 EMA (short-term > long-term)
• Confirms uptrend underway → Hold longs, don't short
MACD crosses below zero line:
• 12 EMA now below 26 EMA (short-term < long-term)
• Confirms downtrend underway → Hold shorts, don't buy
Centerline crossovers are LAGGING (happen after trend established) but have high win rate (~70%). Use for position sizing: MACD > 0 = increase long exposure, MACD < 0 = reduce long exposure or go defensive.
⚡ MACD Divergence (Reversal Warning)
Bullish divergence: Price lower low, MACD higher low → Downtrend weakening
Bearish divergence: Price higher high, MACD lower high → Uptrend weakening
Example: $AAPL bearish divergence
March: Price $180, MACD histogram +1.50
April: Price $190 (higher!), MACD histogram +1.20 (lower!)
→ Divergence warns: "Price up but momentum fading"
→ Watch for bearish crossover to confirm reversal
MACD divergence more reliable than RSI divergence because MACD uses EMAs (trend component). Win rate ~65-70% on daily charts. Always wait for crossover confirmation—divergence alone is NOT an entry signal!
Advanced tip: Combine MACD with price action! MACD bullish crossover + price breaking above resistance = high-probability setup. MACD bearish crossover + price breaking below support = high-probability short. MACD alone has ~55% win rate, but MACD + price confirmation = 65-70% win rate. Never trade indicators in isolation!
Bollinger Bands: Volatility + Mean Reversion
Bollinger Bands measure volatility and identify overbought/oversold conditions. Developed by John Bollinger in the 1980s, they adapt to market conditions—bands widen during volatility (trending) and narrow during consolidation (ranging). The bands are a volatility envelope around price.
Bollinger Band Construction:
Three lines form the bands:
1. Middle Band = 20-period SMA
• The baseline (average price over 20 days)
2. Upper Band = Middle Band + (2 × Standard Deviation)
• 2 std devs above mean
• Statistically, price should stay below 95% of time
3. Lower Band = Middle Band - (2 × Standard Deviation)
• 2 std devs below mean
• Statistically, price should stay above 95% of time
Key insight: Bands expand/contract with volatility!
🔍 The Squeeze: Calm Before the Storm
What it is:
• Bands narrow (low volatility)
• Price consolidating in tight range
• Volume often declining
• Precedes big move (70-80% of time)
But which direction? You need breakout confirmation!
Trading strategy:
1. Identify squeeze (narrowest bands in 6+ months)
2. Wait for breakout (price + volume spike)
3. Enter in breakout direction with stop on other side
4. Target: Distance of squeeze range projected from breakout
Real example: $GME Jan 2021 had massive squeeze → broke out with 10x volume → 20-day run from $20 to $480! Squeezes are volatility coiling—when it releases, moves are explosive.
🎯 Band Touches: Overbought/Oversold
Upper band touch:
• Price in top 5% of statistical range
• Overbought (in ranging markets)
• Strength signal (in trending markets!)
Lower band touch:
• Price in bottom 5% of statistical range
• Oversold (in ranging markets)
• Weakness signal (in trending markets!)
Critical: Context determines meaning!
• Uptrend: Upper band touch = strength (buy dip to middle band)
• Downtrend: Lower band touch = weakness (short rally to middle band)
• Ranging: Band touch = reversal (fade the extreme)
🚀 The Band Walk: Trending Power Move
Bullish band walk:
• Price stays between middle and upper band
• Repeatedly touches upper band (3+ times)
• Strong uptrend—don't sell "overbought"!
Bearish band walk:
• Price stays between middle and lower band
• Repeatedly touches lower band (3+ times)
• Strong downtrend—don't buy "oversold"!
Band walks can last weeks or months! $TSLA 2020 had 6-month bullish band walk ($70 → $880). Rule: Trend ends when price crosses back through middle band and closes on other side. Until then, hold the trend!
Bollinger %B indicator: Measures where price sits within the bands. Formula: %B = (Price - Lower Band) / (Upper Band - Lower Band). Result: %B > 1.0 = above upper band (extreme overbought), %B = 0.5 = at middle band (neutral), %B < 0.0 = below lower band (extreme oversold). Use %B to quantify "how overbought" rather than just visual inspection. %B > 1.0 for 3+ days in uptrend = powerful momentum, but %B > 1.0 in ranging market = reversal imminent.
📉 Interactive: MACD
12
26
9
MACD Histogram
Positive = bullish momentum • Negative = bearish momentum
📊 Interactive: Bollinger Bands
20
2σ
Price
Middle (SMA)
Bands (±2σ)
💡 Band Squeeze: When bands contract, it signals low volatility. A breakout is likely coming.
💡 Band Touch: Price touching the upper/lower band suggests overbought/oversold conditions.
📊 Interactive: Volume Analysis
Show Volume Bars
Green bars = price up • Red bars = price down
Avg Volume
1010K
Today's Volume
667K
Volume Trend
↓ Low
5. Key Takeaways
📈
No Single Indicator is Perfect
Professional traders combine multiple indicators. Use moving averages for trend, RSI for momentum, Bollinger Bands for volatility, and volume for confirmation.
⚖️
Lagging vs Leading
Moving averages are lagging (confirm trends after they start). RSI is leading (can predict reversals). Use both types together.
🎯
Context Matters
A bullish RSI divergence in a downtrend might be a dead cat bounce. A golden cross in a ranging market is a false signal. Always consider the bigger picture.
⏰
Timeframes Stack
Check multiple timeframes. A buy signal on the daily chart is stronger if the weekly chart also shows bullish indicators. This is called confluence.
🛡️
Risk Management First
Even the best indicators fail sometimes. Always use stop losses, position sizing, and never risk more than 1-2% of your capital on a single trade.
📚
Practice Makes Perfect
Paper trade with indicators before risking real money. Learn how they behave in different market conditions. Track your win rate and adjust your strategy accordingly.