Why Technical Indicators Matter
Fundamental analysis tells you what to buy. Technical analysis helps you decide when. Technical indicators are mathematical calculations based on price, volume, or open interest that help traders identify trends, momentum, and potential reversal points.
You do not need to become a chart wizard to benefit from technical indicators. Understanding just three core tools -- moving averages, RSI, and MACD -- will give you a significant edge in timing entries and exits. These indicators are used by professional fund managers and retail traders alike, and they form the foundation of most technical trading systems.
Moving Averages: The Trend Foundation
A moving average smooths out price data by creating a constantly updated average price over a specific period. It strips away daily noise and reveals the underlying trend direction.
Definition
Simple Moving Average (SMA)
The SMA calculates the arithmetic mean of closing prices over a set number of periods. A 50-day SMA adds up the last 50 closing prices and divides by 50. Each data point carries equal weight. The SMA is slower to react to recent price changes but produces fewer false signals.
Definition
Exponential Moving Average (EMA)
The EMA applies a multiplier that gives more weight to recent prices. This makes it more responsive to new information. A 50-day EMA will react faster to a sudden price drop than a 50-day SMA. Traders who need quicker signals prefer the EMA, while those who want to filter out noise lean toward the SMA.
The most widely watched moving averages are the 50-day and 200-day. When the 50-day crosses above the 200-day, it is called a "golden cross" and is considered bullish. When it crosses below, it is a "death cross" and is considered bearish. These signals are not perfect, but they capture major trend shifts that institutional investors pay attention to.
RSI: Measuring Momentum
The Relative Strength Index measures the speed and magnitude of recent price changes to evaluate whether a stock is overbought or oversold. It oscillates between 0 and 100.
Definition
Relative Strength Index (RSI)
RSI compares the average gain on up days to the average loss on down days over a lookback period (typically 14 days). An RSI above 70 suggests overbought conditions -- the price has risen quickly and may be due for a pullback. An RSI below 30 suggests oversold conditions -- the price has fallen sharply and may bounce. The RSI does not predict reversals; it signals that momentum is stretched.
A critical nuance: in strong uptrends, RSI can stay above 70 for weeks. In strong downtrends, it can linger below 30. Buying simply because RSI hits 30 during a bear market will lead to significant losses. RSI works best when combined with trend analysis -- look for oversold RSI readings during an overall uptrend, as these often mark excellent buying opportunities.
MACD: Trend and Momentum Combined
The Moving Average Convergence Divergence indicator combines trend-following and momentum into one tool. It is one of the most versatile indicators available.
Definition
MACD (Moving Average Convergence Divergence)
MACD is calculated by subtracting the 26-period EMA from the 12-period EMA. The result is the MACD line. A 9-period EMA of the MACD line is plotted alongside it as the "signal line." When the MACD line crosses above the signal line, it is a bullish signal. When it crosses below, it is bearish. The histogram (the bar chart between the two lines) shows the distance between them, representing the strength of momentum.
MACD divergence is particularly powerful. If a stock makes a new price high but the MACD makes a lower high, it suggests momentum is weakening even though price is still rising. This bearish divergence often precedes corrections. The opposite -- price making lower lows while MACD makes higher lows -- is bullish divergence and can signal the end of a downtrend.
Common Mistakes
- Using indicators in isolation. No single indicator is reliable on its own. The best setups occur when multiple indicators confirm the same signal -- for example, an oversold RSI combined with a bullish MACD crossover near a major moving average support.
- Ignoring the trend. Indicators behave differently in trending versus ranging markets. RSI overbought signals work well in sideways markets but generate false sells in strong uptrends. Always identify the primary trend first.
- Over-optimizing parameters. Changing the RSI period from 14 to 9 to 21 to fit past data is curve-fitting. Standard settings exist because they work across many markets and time frames. Start with defaults before customizing.
- Treating indicators as predictive. Indicators describe what has happened and quantify current conditions. They do not predict the future. A bullish MACD crossover increases the probability of upward movement; it does not guarantee it.
- Ignoring volume. Price-based indicators are more reliable when confirmed by volume. A breakout above a moving average on high volume is far more significant than one on low volume.
Tip
Start with just one indicator and learn it deeply before adding more. Most professional traders use two to three indicators maximum. Cluttering your chart with ten overlapping indicators creates confusion, not clarity.
How Journely Uses Technical Indicators
When you ask Journely to analyze a stock, the AI automatically computes RSI, MACD, and key moving averages across multiple time frames. Rather than showing you raw numbers, it interprets them in plain language: "RSI is at 28 on the daily chart, suggesting oversold conditions within a longer-term uptrend -- historically a favorable entry zone for this stock."
Journely also detects divergences, golden and death crosses, and moving average support and resistance levels. It combines these technical signals with fundamental data to give you a complete picture, so you never have to choose between the two approaches.