Essential tools: The five technical analysis indicators that every trader must master

Why do these indicators dominate technical analysis?

Technical analysis indicators are the compasses of the modern trader. Every trading strategy requires tools that allow for the interpretation of price movement beyond what the candle on the chart shows. Some traders seek to capture market momentum, others prefer to filter out noise, and many need to measure when volatility reaches critical points.

However, the abundance of available indicators creates confusion. Which one to choose? The answer depends on your trading style. That’s why in this analysis we review the five most reliable and widely used technical analysis indicators: the Relative Strength Index, Moving Averages, MACD, Stochastic RSI, and Bollinger Bands.

1. Relative Strength Index (RSI): Detecting market extremes

The RSI is a momentum indicator that measures the magnitude of recent price changes to determine whether an asset is overbought or oversold. It works as an oscillator that fluctuates between 0 and 100.

The standard setting uses 14 previous periods ( 14 days on daily charts, 14 hours on hourly charts, etc. ). An RSI above 70 suggests overbought conditions, while a value below 30 indicates possible overselling. These extremes can warn of imminent reversals, although they should not be interpreted as direct buy or sell signals.

How does the operator interpret momentum? If the RSI rises while the price increases, the bullish trend is strong. If momentum decreases during a price increase, sellers may be taking control of the market. This divergence between price and momentum is the true strength of the indicator.

2. Moving Average (MA): Your trend reference

Moving averages smooth out price behavior to highlight the direction of the market trend. They are classified into two main types:

Simple Moving Average (SMA): Calculates the average price over a specified period. A 10-day SMA represents the average price of the last 10 days.

Exponential Moving Average (EMA): Gives more weight to recent price data, reacting more quickly to changes. A 12-period EMA will capture emerging trends faster than an equivalent SMA.

Traders use these tools in strategic ways. If the price remains above the 200-day SMA for an extended period, many consider the asset to be in a bull market. Crosses between moving averages also generate signals: when the 100-day SMA crosses below the 200-day SMA, it indicates that the short-term momentum is no longer following the upward trend, increasing the likelihood of a reversal.

It is important to remember that moving averages are lagging indicators. Longer periods create greater lag. The 200-day SMA reacts more slowly than the 50-day SMA.

3. Moving Average Convergence Divergence (MACD): Capturing momentum changes

The MACD determines the momentum of an asset by showing the relationship between two exponential moving averages. It is composed of:

• MACD Line: It is calculated by subtracting the 26-period EMA from the 12-period EMA.
• Signal Line: A 9-period EMA plotted over the MACD line.
• Histogram: Visually shows the distance between both lines.

Its practical use lies in detecting divergences. If the price hits a higher high but the MACD marks a lower high, the market could experience a reversal soon. What's the message? The price is rising, but the momentum is falling. Traders also look for crosses: when the MACD line crosses above the signal line, it may suggest a buy signal; when it crosses below, it could indicate a sell signal.

The MACD is frequently used alongside the RSI because both measure momentum from different perspectives. Together they provide a more comprehensive technical view of the market.

4. Stochastic RSI (StochRSI): Momentum of the impulse

The Stochastic RSI is an oscillator derived from the RSI. Instead of working directly with price data, it applies the stochastic oscillator formula to the RSI values themselves.

Typically, it oscillates between 0 and 1 ( or 0 and 100 in some charts). A reading above 0.8 indicates overbought conditions, while a value below 0.2 suggests oversold conditions. A value of 0 means the RSI is at its minimum for the measured period; a value of 1 indicates it is at its maximum.

This indicator is significantly more sensitive than the standard RSI, generating multiple signals that can be difficult to interpret. It is more reliable when it is near the extremes of its range. However, it is important to note that the Stochastic RSI tends to produce false signals more frequently than other technical analysis indicators.

5. Bollinger Bands (BB): Measuring volatility and extremes

Bollinger Bands consist of three lines that simultaneously measure market volatility and overbought/oversold conditions:

• Medium Band: A SMA (normally of 20 periods).
• Upper and Lower Band: Two standard deviations away from the middle band.

Higher volatility means greater distance between bands. Lower volatility causes the bands to close. When the price approaches the upper band, the asset is nearing overbought conditions. When it approaches the lower band, it is nearing oversold conditions.

A crucial concept is the “squeeze” (contraction): a period of low volatility where the bands converge significantly. This indicates potential future volatility. Conversely, if the bands are widely separated, a period of decreasing volatility may be approaching.

Combining indicators for better decisions

Although technical analysis indicators present objective data, their interpretation is fundamentally subjective. Two traders can read the same chart and come to opposing conclusions.

The key is not to rely on a single indicator. Experts combine multiple tools—RSI with MACD, Moving Averages with Bollinger Bands—to obtain cross confirmations. Many also integrate fundamental analysis for a comprehensive view of the market.

Mastering technical analysis indicators requires constant practice. Each market, each asset, and each timeframe may require different calibrations. Experience teaches when to trust these indicators and when to recognize their limitations.

Important legal notice: This content is provided for informational and educational purposes only, without any guarantees of any kind. It does not constitute financial, legal, or professional advice, nor a recommendation to buy specific assets. You should seek guidance from qualified professional advisors. The prices of digital assets are highly volatile and you could lose your entire investment. Only you are responsible for your trading decisions. This material should not be interpreted as professional financial advice.