We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Indicators are independent trading systems developed and introduced by successful traders.
- Indicators are leading or lagging. Leading indicators signal the possible occurrence of an event. Lagging indicators, on the other hand, confirms an ongoing trend.
- RSI is a momentum oscillator that oscillates between 0 and 100 levels.
- A value between 0 and 30 is considered oversold. Hence the trader should look at buying opportunities.
- A value between 70 and 100 is considered overbought. Hence the trader should look at selling opportunities.
- If the RSI value is fixed in a region for a prolonged period, it indicates excess momentum. Hence, the trader can consider initiating a trade in the same direction instead of taking a reversed position.
- A MACD is a trend following system.
- MACD consists of a 12 Day, 26 days EMA.
- MACD line is 12d EMA – 26d EMA.
- The signal line is the nine days SMA of the MACD line.
- A crossover strategy can be applied between the MACD Line and the signal line.
- The Bollinger band captures the volatility. It has a 20-day average, a +2 SD, and a -2 SD.
- One can short when the current price is at +2SD, expecting that the price reverts to the average.
- One can go long when the current price is at -2SD, expecting the price to revert to the average.
- BB works well in a sideways market. The BB’s envelope expands in a trending market and generates many false signals.
- Indicators are good to know, but they should not be treated as a single decision-making source.