This page goes through the popular indicators one by one. For each, it explains what the indicator measures, puts the formula into words, lists the usual settings, describes how traders read it and points out where it falls short. Every one of them is arithmetic on past prices, so none can tell you what happens next (technical analysis).
Key points
- An indicator runs arithmetic over past prices or volume. It sums up what has already occurred and can’t spot anything that hasn’t yet taken place.
- Trend indicators tell you the direction prices have moved. Examples include moving averages, MACD, ADX and Supertrend. They give late signals, and in a sideways market they signal in both directions.
- Momentum indicators like RSI and stochastic look at the latest price against its recent range. In a strong trend, they can show overbought or oversold levels for weeks.
- Volatility indicators measure how big recent moves have been. Bollinger Bands and ATR are volatility indicators. They say nothing about direction.
- Volume indicators like VWAP and on-balance volume rely on real volume. CFDs and currency pairs don’t have a central volume figure, so the platform uses a stand-in.
- No indicator has been shown to be the most accurate. Published research on whether indicator rules make money after costs is mixed.
What is a technical indicator?
A technical indicator is a formula that creates one number per period from a sequence of past prices, and it may also use past volume. The platform shows that number as a line, either on the price chart or in a panel beneath it. If the price history changes, the line changes too. No other inputs are used.
Most indicators come with one or two settings, which usually control how many periods you look back across. A short look-back responds quickly but produces many false signals. A long look-back is more stable and arrives later. No setting escapes that trade-off, and picking the setting that worked best on old data is how overfitting starts. Overfitting is when you tailor a rule so tightly to old prices that it ends up matching their random noise.
Traders group indicators into families based on what they measure: trend, momentum, volatility (how much the price swings about) and volume. Indicators in the same family mostly show similar signals because they use the same price data. The chart patterns page shows the shapes traders watch for in the price itself.
Trend indicators: moving averages, MACD, ADX and Supertrend
Trend indicators smooth past prices to show the direction a market has been moving and how steadily it has moved. They are the tools behind trend following, and the four indicators below all react only after a move has begun.
Moving averages (SMA and EMA)
A moving average takes the average price across the most recent fixed number of periods, and it refreshes whenever another period ends. The simple moving average (SMA) totals the closing prices, then divides that total by the period count (TradingView, Moving Average). The exponential moving average (EMA) weights the latest price more heavily. That weight is 2 divided by the number of periods plus 1, so a 10-period EMA gives the newest close about 18 % of its value (StockCharts, Moving Averages).
The 50-day and 200-day averages are the most watched lengths (StockCharts, Moving Averages). Traders interpret a price above a rising average as an uptrend. They label the shorter average crossing above the longer one a golden cross, and the opposite move a death cross. Averages suffer from lag, with longer ones lagging more. In a sideways market, crossovers come one after another, each costing the spread, the gap between the buy and sell price.
MACD
MACD stands for moving average convergence divergence and shows the difference between a fast and slow EMA of the same price. Gerald Appel developed it in the 1970s, and Thomas Aspray introduced the histogram in 1986 (TradingView, MACD). The usual settings are 12, 26 and 9. The MACD line equals the 12-period EMA minus the 26-period EMA. The signal line is a 9-period EMA of the MACD line. The histogram is the result of subtracting the signal line from the MACD line (StockCharts, MACD).
Traders read MACD by looking at two crossovers. One is the MACD line moving through its signal line. The other is the MACD line crossing zero. Traders also keep an eye out for divergence, which happens when price reaches a new high but MACD doesn’t. MACD lags twice over because it’s built from two averages. It has no ceiling or floor, and its size reflects the market’s price. That means you can’t compare one market’s reading with another’s (StockCharts, MACD).
ADX indicator
The ADX indicator (average directional index) tells you how strong a trend is, not which direction it’s moving. Welles Wilder designed it for daily commodity charts. The calculation starts from two lines, +DI and −DI, which track upward and downward movement against the true range. ADX then smooths the gap between those lines over 14 periods (TradingView, ADX).
ADX runs from 0 to 100. Wilder’s reading treats a figure above 25 as a strong trend and a figure below 20 as a weak or absent one. Which DI line sits on top tells you the direction (TradingView, ADX). Because ADX is smoothed twice, it counts among the slowest indicators on a chart. It often climbs only once a good chunk of the move has already passed.
Supertrend indicator
The Supertrend indicator shows a single line, placing it beneath the price during an uptrend and above during a downtrend. It calculates the midpoint of each period’s high and low, then creates an upper and lower band by adding or subtracting a multiple of the average true range (ATR). The line sticks to one band until the price closes beyond it, then switches to the opposite band (TradingView, Supertrend).
The two settings for Supertrend are the ATR length and the multiplier. Platforms colour the line green during an uptrend and red during a downtrend. Some traders use it as a trailing exit level. TradingView’s own documentation says it produces false signals at times (TradingView, Supertrend). Those come in sideways markets, where the price crosses the line again and again.
Momentum indicators: RSI and the stochastic oscillator
A momentum indicator shows how quickly the price has moved compared with its own recent history. The two indicators below are oscillators, and they swing between 0 and 100 in a panel below the chart.
RSI (relative strength index)
RSI weighs the size of recent gains against the size of recent losses. Welles Wilder introduced it in his 1978 book New Concepts in Technical Trading Systems. To find RS, divide the average gain on up periods by the average loss on down periods. Then RSI = 100 − 100 ÷ (1 + RS). The usual setting is 14 periods (TradingView, RSI).
Wilder described a reading above 70 as overbought, below 30 as oversold and 50 as showing no trend (TradingView, RSI). A level marked overbought doesn’t mean the price will soon drop. During a strong uptrend, RSI can remain above 70 for weeks. If you sell based only on that signal, you’re going against the trend throughout. That failure is the one a mean-reversion rule is exposed to.
Stochastic oscillator
The stochastic oscillator displays the latest close relative to the recent high-to-low range. George Lane created it in the 1950s. The primary line, %K, works out as the close minus the lowest low, divided by the highest high minus the lowest low, times 100. A second line, %D, is a moving average of %K. The usual settings use 14 periods for %K and 3 for %D (TradingView, Stochastic).
Traders read the stochastic through its default thresholds of 80 for overbought and 20 for oversold, and through %K crossing %D (TradingView, Stochastic). The stochastic reacts faster than RSI, so it gives more signals and more of them are false. Like RSI, it can stay pinned at one extreme for as long as a trend lasts.
Volatility indicators: Bollinger Bands and ATR
Volatility indicators measure how big recent price moves have been, whichever way they went. Their main honest use is sizing: how far away a stop sits and how big a trade is (risk management).
Bollinger Bands
Bollinger Bands place a band above and below a moving average, each set a fixed number of standard deviations from it. John Bollinger created them in the early 1980s, and his default is a 20-period average with bands at plus and minus two standard deviations (Bollinger Bands, official site). Standard deviation measures how spread out the prices are. The bands widen as the market gets busier and narrow when it goes quiet.
Traders read the bands as a guide to whether a price is high or low compared with its recent average. A touch of a band is not a signal on its own. Bollinger’s own method treats a tag of the upper band as a sell setup only when a second indicator fails to confirm it (Bollinger Bands, official site). In a trend the price can travel along one band for a long time, and a narrow band says a bigger move may come without saying which way.
ATR indicator (average true range)
The ATR indicator, which Welles Wilder introduced in 1978, averages the true range of recent periods. True range is the largest of three distances: the high minus the low, the high minus the previous close, and the previous close minus the low. The default is 14 periods (TradingView, ATR).
ATR works as a distance. So that ordinary noise doesn’t reach it, a stop-loss, the price at which you’ve decided to get out, often sits a multiple of ATR away (stop-loss orders). ATR has no view on direction, and because it’s stated in price units, a higher-priced market shows a bigger ATR and two markets can’t be compared directly (TradingView, ATR).
Volume indicators: VWAP and on-balance volume
Volume indicators combine price with the amount traded. They work as designed on exchange-traded shares and futures, but less well on CFDs and currency pairs. On those, the volume on the chart is a count of price changes (technical analysis).
VWAP (volume-weighted average price)
VWAP is the session’s average price, with every price weighted by the volume traded at it. For each period, take the typical price (high plus low plus close, divided by three) and multiply it by that period’s volume. Add those results from the session’s start, then divide by the total volume so far. The sum resets at each new session, unless you pick a different anchor (TradingView, VWAP).
Traders take a price above VWAP as a sign that buyers have had the upper hand in the session, and a price below it as a sign that sellers have. Because VWAP is a cumulative average, its lag increases through the day (TradingView, VWAP). With a currency pair you have no exchange volume to weight by, so the line rests on tick counts.
On-balance volume (OBV)
On-balance volume is a running total of volume. The total rises on rising days and falls on falling days. Joe Granville came up with it in 1963. The period’s volume is added when the close beats the previous close and subtracted when it falls below (TradingView, OBV).
Traders look at OBV to see its direction, not its level. When price goes up but OBV stays flat or drops, they see it as a move with little participation. The calculation is crude: even a close a fraction higher counts all of that period’s volume as buying. No single volume indicator is the best on TradingView or anywhere else, since each answers a different question and all rely on the volume data behind the chart.
How does Fibonacci retracement work?
Fibonacci retracement is a drawing tool that splits a past price move into fixed fractions. You set the low and high of that move. The tool then places horizontal lines at 23.6 %, 38.2 % and 61.8 % of the distance between those points, levels derived from the Fibonacci number sequence (TradingView, Fibonacci retracement). Traders treat those lines as possible support and resistance, prices where a pullback might stop.
Fibonacci retracement has a flaw: market arithmetic doesn’t force prices to stop at those levels. The lines change based on the high and low you choose, and two traders rarely pick the same points. With multiple lines drawn, a pullback is likely to reverse near one of them by chance. Whether the levels predict anything isn’t established.
A worked RSI example
Worked arithmetic: the numbers follow from the formula given in this section.
A worked RSI example shows how little goes into the number. The figures are made up. Say a market climbed in nine of the last 14 periods and dropped in five. The rises total 16.8 points and the falls total 5.6 points.
The average gain is 16.8 ÷ 14 = 1.2 and the average loss is 5.6 ÷ 14 = 0.4. Then RS is 1.2 ÷ 0.4 = 3. The RSI is 100 − 100 ÷ (1 + 3) = 100 − 25 = 75, so the market shows as overbought on the chart.
All a reading of 75 tells you is that gains over those 14 periods were three times the size of losses. If the next period drops 2 points, the RSI falls to about 68. With the usual smoothing, the average gain becomes 1.2 × 13 ÷ 14 ≈ 1.11 and the average loss (0.4 × 13 + 2) ÷ 14 ≈ 0.51. The indicator followed the price down but didn’t call the fall.
Do technical indicators work?
For decades researchers have asked whether technical indicators work after costs, and the published answer is mixed. A 2007 survey in the Journal of Economic Surveys tallied 95 modern studies of technical trading rules. Of the 95, 56 found positive results, 20 found negative results and 19 were mixed (Park and Irwin, 2007).
The survey warns against taking the positive results at face value. Its authors point to data snooping, rules picked with hindsight and poor estimates of risk and transaction costs. Their conclusion is that the evidence isn’t conclusive (Park and Irwin, 2007). Data snooping means testing many rules on the same prices and reporting the winner.
Most academic tests leave out or understate the costs a retail CFD account pays (costs and fees). Those costs include the spread on every trade and overnight financing on trades held past the daily cut-off. You also pay slippage, the gap between the price you asked for and the price you got. Only after clearing all of them does an indicator rule have any expectancy, meaning an average profit per trade. On a demo account you can watch a rule without paying, though demo fills flatter the result.
Common questions about technical indicators
Common questions about technical indicators ask which one is most accurate and how traders interpret the popular ones. Each answer below explains the tool and provides no trading advice.
What is the most accurate trading indicator?
No trading indicator has been shown to be the most accurate. Every indicator is a calculation on past prices, so accuracy changes with the market. Trend indicators look right in trends and wrong in ranges, while momentum indicators do the reverse. A published survey of the research found mixed results. The survey flagged data snooping and costs as problems in the positive studies (Park and Irwin, 2007).
How do traders use RSI?
Traders use RSI to see whether recent gains have outweighed recent losses. The indicator runs from 0 to 100, usually on a setting of 14 periods. Readings above 70 are called overbought, and readings below 30 are called oversold (TradingView, RSI). These labels describe the recent past. In a strong trend RSI can stay at an extreme for weeks.
How do traders use MACD?
Traders use MACD by watching for two crossovers, when the MACD line moves through its signal line and when it moves through zero. The MACD line equals a 12-period EMA minus a 26-period EMA, and the signal line is a 9-period EMA of it (StockCharts, MACD). Neither signal arrives until the move has started, and in a sideways market both reverse often.
How do traders use Bollinger Bands?
Traders use Bollinger Bands to see how volatile the market has been and whether a price sits high or low compared with its recent average. The default is a 20-period average, with bands placed two standard deviations above and below it (Bollinger Bands, official site). A band touch on its own isn’t a buy or sell signal, and the bands give no clue about the direction a move will take.
How do traders use Fibonacci retracement?
Traders use Fibonacci retracement by picking a past move’s low and high, then watching the lines the tool draws between those points. The levels depend on the two points chosen. The usual lines sit at 23.6 %, 38.2 % and 61.8 % of the move (TradingView, Fibonacci retracement). Whether prices respect those lines more than chance would allow isn’t established.
What is a momentum indicator?
A momentum indicator gauges how quickly a price has shifted relative to its own recent range. The two best known are RSI and the stochastic oscillator, and both oscillate between 0 and 100. They tend to work in sideways markets, but tend to fail in strong trends, where they stay at one extreme.
What is the best volume indicator on TradingView?
No volume indicator on TradingView is the best in general, because each one addresses a different question. VWAP gives you the volume-weighted average price for a session. On-balance volume tracks a running total of volume, added or subtracted according to the direction of each close. Both rely on the volume data behind the chart. A CFD or currency-pair chart usually displays tick counts instead of traded volume (trading platforms).
Risk warning
An indicator signal doesn’t reduce the risk of a leveraged trade
An indicator signal tells you what prices did. It can’t reduce the risk of a leveraged trade, one much bigger than the margin you put up as a deposit. A loss on a trade taken from a clean signal is the same size as a loss on any other trade. ESMA reported national regulators’ findings that between 74 % and 89 % of retail CFD accounts lost money (ESMA press release). Those accounts had the same indicators on their platforms as everyone else.
Sources
The original documents this page cites, in the order they first appear.
- Moving Average, TradingView
- Moving Averages: Simple and Exponential, StockCharts ChartSchool
- MACD (Moving Average Convergence/Divergence), TradingView
- MACD (Moving Average Convergence/Divergence) Oscillator, StockCharts ChartSchool
- Average Directional Index (ADX), TradingView
- Supertrend, TradingView
- Relative Strength Index (RSI), TradingView
- Stochastic (STOCH), TradingView
- Bollinger Bands, Bollinger Capital Management
- Average True Range (ATR), TradingView
- Volume Weighted Average Price (VWAP), TradingView
- On Balance Volume (OBV), TradingView
- Fibonacci retracement drawing tool, TradingView
- What Do We Know About The Profitability Of Technical Analysis?, Journal of Economic Surveys (via IDEAS/RePEc), 2007-09-01
- European Securities and Markets Authority, ESMA
- ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors, ESMA, 2018-03-27