Moving Averages: The Foundation
A moving average (MA) smooths out price data to show the overall direction. The Simple Moving Average (SMA) calculates the average closing price over N periods. The Exponential Moving Average (EMA) gives more weight to recent prices, making it faster to react.
Common settings: 20-period EMA for short-term trend, 50-period SMA for medium-term, 200-period SMA for long-term. When price is above the 200 SMA, the long-term trend is up. When the 50 crosses above the 200 (golden cross), it signals a major bullish shift. The opposite (death cross) signals bearish.
RSI: Relative Strength Index
RSI measures momentum on a 0-100 scale. Above 70 is ‘overbought’ (price may pull back). Below 30 is ‘oversold’ (price may bounce). The standard period is 14. RSI doesn’t tell you to buy or sell — it tells you whether momentum is stretched.
Advanced RSI use: look for divergence. If price makes a higher high but RSI makes a lower high, momentum is weakening — a potential reversal signal. RSI divergence is one of the most reliable reversal indicators when combined with support/resistance levels.
MACD: Moving Average Convergence Divergence
MACD shows the relationship between two moving averages (typically 12 EMA and 26 EMA). The MACD line is the difference between them. The signal line is a 9-period EMA of the MACD. The histogram shows the gap between the two.
Trading signals: when MACD crosses above the signal line, it’s bullish. When it crosses below, it’s bearish. The histogram expanding means momentum is increasing; contracting means it’s fading. MACD works best in trending markets — avoid it in ranging conditions.
Bollinger Bands and Fibonacci
Bollinger Bands plot a moving average with bands 2 standard deviations above and below. When bands squeeze tight, low volatility suggests a breakout is coming. When price touches the outer band, it’s at an extreme. Bands expanding rapidly signal high volatility.
Fibonacci retracement levels (23.6%, 38.2%, 50%, 61.8%) mark potential pullback zones within a trend. After a strong move, price often retraces to the 38.2% or 61.8% level before continuing. Many traders place entries at these levels with tight stop-losses just beyond the next Fibonacci level.