The 10 Best Technical Trading Indicators: Explanation, Usage & Examples

Technical trading indicators help traders navigate the labyrinth of any traded market. They are necessary for understanding many aspects of price movements, leading to the best trades possible. 

While indicators have existed for decades, enthusiast chartists continue to release new or modified ones. Of course, it’s impossible to use them all, nor is it recommended to utilize more than two.

Regardless, having ten options is sufficient for any trader to choose their ultimate one. Here’s a summary for each indicator:

1. Moving averages – overall best for trends
2. MACD – a versatile form of moving averages
3. RSI – overall best for momentum
4. Stochastics – best for short-term momentum trading
5. Bollinger Bands® – best for trend and volatility
6. ATR – best for observing volatility range
7. Fibonacci – best for identifying support and resistance
8. Money Flow Index – best for volume and momentum
9. ADX –  good alternative to moving averages
10. A/D – best for price-volume divergences

What Are Technical Trading Indicators?

A technical trading indicator (or simply trading indicator) is a graphical tool on a charting platform that offers specific market information according to historical data. It uses a pre-programmed formula and automatically updates as the price progresses. 

The charting software often displays the indicator at the bottom of the chart or overlays it on certain areas.

Indicators form the majority of technical analysis. Technical analysts use price action, chart patterns, and other visual information to speculate on price movements along with the former.

Many of these technical tools are accessible, user-friendly, and effectively present key price information. Yet, they are less predictive because they only account for historical data without considering present and future data (unlike fundamental analysis). This is why experts refer to indicators as lagging.

Types of Trading Indicators

Just as there are types of musical instruments, the same applies to trading indicators. However, it’s worth noting that a few of these tools can serve multiple purposes. 

Nonetheless, let’s look at the main kinds of indicators in more detail.

Trend Indicators

Given the importance of the trend, trend indicators are the bread and butter of trading. This concept refers to the predominant direction (bullish, bearish, or sideways) in which a market travels over a defined period. A simple yet effective way to determine a trend is using a trend line. However, trend indicators are more advanced as they consider the different aspects of price. 

Moving averages (MAs) are the go-to trend indicator, a tool part of many other indicators. Other popular trend-based indicators include the Moving Average Convergence/Divergence (MACD) and Bollinger Bands.

Momentum Indicators

Momentum indicators measure a market’s velocity over a set time, typically using extreme high and low bands. The indicator will oscillate (hence why many momentum tools are oscillators) between this range to identify overbought and oversold zones.

‘Overbought’ describes very bullish momentum, where the price will likely retrace or continue. Meanwhile, ‘oversold’ describes very bearish momentum, where the market will likely correct itself or move down even lower.

Another standout feature with momentum tools is divergence. This happens when the price moves in the opposite direction or trajectory to the indicator. Divergence is one of the first signs of a potential reversal. However, ‘hidden’ divergence resembles trend continuation.

The most well-known momentum tools include the Relative Strength Index (RSI), MACD, and stochastics.

Volatility Indicators

American investment advisor John Train once said volatility creates opportunities for investors who know what they are doing. So far, we know that trend equals direction, and momentum describes velocity. 

Volatility refers to the rate or magnitude of price movements. It can be likened to measuring how many kilometers someone runs over different periods. We typically measure market fluctuations as points, pips, or ticks (depending on the asset).

Higher volatility means that a market has covered more ground in a specific period than normal, often accompanied by large swings. Meanwhile, lower volatility is the opposite; it’s when a market has moved less in range than the average, resulting in shallow swings.

The Average True Range (ATR) and Bollinger Bands are the most used tools specializing in volatility.

Volume Indicators

Volume in the traded market refers to the quantity (units, shares, contracts, etc.) being traded for the asset in question. This concept goes hand in hand with those already mentioned. For instance, the start of an uptrend results from increased buying volume. Conversely, the beginning of a downtrend stems from an increase in selling volume.

It’s worth noting that standard volume indicators are the least accurate, as most traded markets are decentralized. The exception is when one trades on exchanges (e.g., the futures exchange, stock exchange, crypto exchange) where real volume data is available. 

Nonetheless, popular volume indicators include the Money Flow Index and Accumulation/Distribution Index, among others.

Support And Resistance Indicators

Support and resistance refers to the tendency for the market to reach and retrace from certain areas on a chart. ‘Support’ happens when it fails to break below a certain price, while ‘resistance’ occurs when it fails to break above a certain price. We can represent support as the ‘floor’ while the resistance as the ‘ceiling.’ 

Unlike other indicators, support and resistance don’t rely on a graphic tool (although they use historical data). Rather, they present themselves according to marked key levels. Fibonacci and pivot points are the most popular methods for anticipating support and resistance.

What Are The Best Technical Trading Indicators?

After describing the different indicator types, we’ll examine the ten best indicators individually.

Moving Averages

Let’s begin by looking at the ‘granddaddy’ of indicators, the moving average (MA). The moving average is a concept that extends beyond trading, having roots in statistics and mathematics. It’s a tool in trading that forms the basis of other technical indicators.

The moving average is a dynamic or ‘moving’ line taken from the average of certain data within a defined period. Its purpose is to show a constantly updated price value. The easiest demonstration is with the simple moving average (SMA), which adds a set of prices (close, open, high, low) and divides by the total number of prices.

Another popular type of MA is the exponential moving average (EMA). The EMA uses a different calculation and gives more weight to recent prices. Regardless, interpreting the moving average for trend purposes is straightforward.

Traders observe the current market price in relation to the moving average (MA). We consider the trend bullish when the market is above the MA or bearish when it is below the MA. The angle of the moving average confirms the predominant direction. Furthermore, a ‘flat’ or linear MA indicates a sideways market.

Traders often use two moving averages for better trend confirmation and observing crossovers for capitalizing on trend changes.

Pros	Cons
✅ Ease to use	❌ Determining the best MA period is subjective
✅ Hugely popular	❌ Moving averages only have a single function
✅ Many types of moving averages exist
✅ Works well with other indicators

Moving Average Convergence Divergence (MACD)

We can think of the MACD as the super-upgraded version of its predecessor, the moving average. Gerald Appel invented the former in the late 70s to serve multiple purposes around identifying momentum and trends. 

This indicator consists of the MACD line and signal line. The MACD line reflects the relationship between two exponential moving averages (with the 26 and 12 periods). Meanwhile, the signal line is a 9-day EMA on a histogram with the MACD line. 

A bullish signal happens when the MACD line crosses the signal from underneath. Conversely, a bearish signal occurs once the MACD line crosses the signal from atop.

The zero line is another crucial element of the MACD for confirming trends. We consider the market bullish when the MACD is above this line and bearish when it is below this line.

Many strategies with this indicator revolve around the interactions between the histogram bars and the MACD/signal lines, mainly in the form of crossovers. Traders can also capitalize on divergence using the MACD.

Pros	Cons
✅ Simple to utilize	❌ Offers fewer divergence opportunities (despite being strong)
✅ More versatile than moving averages	❌ MACD is less effective in range-bound markets
✅ Divergence signals tend to be stronger than other momentum indicators

Relative Strength Index

The Relative Strength Index (RSI) is the brainchild of John Welles Wilder Jr., who created many other trading indicators in the 1978 book ‘New Concepts in Technical Trading Systems.’ It’s perhaps the most used oscillator. 

The purpose of the RSI is to chart the momentum of a traded asset over a certain period (often 14 days) on a 0-100 line graph. Readings above 70 indicate overbought conditions, while those below 30 suggest oversold conditions.

The price often moves further in its current direction or retraces. Many traders use the 50 level as another reference point, where readings above it imply a bullish market while below it imply a bearish market. 

Divergence is another staple of the RSI, offering more setups than the MACD. 

Other ways traders use the RSI combine trendlines and breakouts. Some also overlay an additional RSI to capitalize on crossovers similar to moving averages. 

Pros	Cons
✅ Simple to use	❌ Cannot accurately predict a market reversal and trend strength
✅ Among the most popular momentum indicators	❌ Offers less reliable divergence
✅ Plenty of divergence opportunities

Stochastics

Stochastics is another well-known momentum indicator or oscillator created by George Lane in the late 50s. It consists of a %K and %D line fluctuating on a 0-100 line graph like the RSI. The %K accounts for how the most recent closing price has closed compared to the lowest and highest price over 14 days. Meanwhile, the %D line is a 3-period moving average of %K.

The primary use of stochastics is identifying oversold (readings below 20) and overbought (readings above 80) conditions. Since the %K and %D lines overlap, stochastics also help with crossovers. A bearish signal materializes when the %K crosses below the %D, while a bullish signal happens when the %D crosses above the %K.

Divergences are also another element of stochastics. However, the indicator is much more sensitive than the MACD and RSI. While it results in many set-ups, some may be false signals. However, this feature makes it more suitable for short-term traders.

Pros	Cons
✅ Popular indicator	❌ Too sensitive compared to other momentum indicators
✅ Best for short-term trading

Bollinger Bands® 

Bollinger Bands® is a unique trend and volatility-based indicator developed by John Bollinger in the 1980s. Like momentum tools, traders can use the former to measure overbought and oversold moments.

Bollinger Bands consists of three bands. The middle band is a default 20-day moving average, while the lower and upper bands represent standard deviations from the center band.

We regard the market as bullish when its price is above the middle band and overbought when it exceeds the upper band. Meanwhile, it’s bearish when the price is below the middle band and oversold when it exceeds the lower band.

We consider the latter moments of overbought and oversold as periods of high volatility. On the other hand, volatility is low when the bands ‘squeeze’ or contract. Traders will keenly wait for the expansion when the market often picks up steam.

Pros	Cons
✅ Generates precise entry, stop loss, and take profit parameters	❌ More messier on the charts than other indicators
✅ Serves the purpose of gauging trend and volatility	❌ Not the best tool for extreme price readings
	❌ A bit more complex for newbies

Average True Range

The Average True Range (ATR) is a volatility indicator also credited to John Welles Wilder Jr. It’s a non-directional tool, meaning we don’t use it to determine market direction. 

Wildes Jr. defined the ‘true range’ as:

• The absolute value of the current high less the previous close
• The absolute value of the current low less the previous close

He represented this courtesy of a 14-day moving average on a simple line chart with the range on the Y-axis. 

The ATR tells us how much a market has moved (for instance, pips in forex) over a specific time frame. For instance, a reading of 50 on the 4-hour chart of EUR/USD means this market has moved, on average, 50 pips in the past four hours. 

This information is indispensable for setting stop losses that appropriately account for volatility. The same logic applies to profit targets. 

Ultimately, the ATR provides an updated picture of the depth of fluctuations in the markets. Later, we’ll cover how to use the indicator for support and resistance.

Pros	Cons
✅ Ease to use	❌ Non-directional indicator
✅ Useful for setting stop losses and projecting profit targets
✅ Estimates the depth of price ranges
✅ Works well with any indicator

Fibonacci retracements

Fibonacci retracements are a standard drawing tool on charting platforms. They are horizontal lines based on the age-old Fibonacci series (1,1,2,3,5,8,13,21,34, 55, etc.). 

The relationship among these figures offers specific turning points as a percentage of a retracement: 0.236 (23.6%), 0.382 (38.2%), 0.5 (50%), 0.618 (61.8%), 0.786 (78.6%) and 1 (100%).

With some practice, drawing Fibonacci on the charts becomes second nature. When plotting the tool

• Traders measure from the tip of the high to the tip of the low for a bearish move. 
• Traders measure from the tip of the low to the tip of the high for a bullish move.

Fibonacci’s goal is to forecast potential support and resistance or reversal points. Aside from acting as entry triggers, traders can use these to place stop losses or take-profit levels. Generally, expect:

• A shallow retracement to happen between 23.6-38.2%
• A medium retracement to occur around 50%
• A deep retracement to happen between 61.8-78.6%

Pros	Cons
✅ Based on advanced mathematics	❌ Not beginner-friendly
✅ Decent in identifying support and resistance	❌ Non-directional
✅ Can provide guidance on stop loss and profit target placement
✅ Works well with other indicators

Money Flow Index

The Money Flow Index (MFI), created by Gene Quong and Avrum Soudack, is an oscillator similar to the RSI. It identifies overbought and oversold signals and spots divergence in a traded asset. Yet, the MFI incorporates volume and momentum instead of only momentum, leading some to call it a ‘volume-weighted RSI.’

The original purpose of this indicator was to show the so-called flow of money in and out of a market within a certain period. This is calculated by considering the positive and negative money flow values, creating a money ratio, which is then normalized into oscillator form. 

Like the RSI, the MFI oscillates on a 0-100 line graph. Readings above 80 tell us the market is overbought, while those below tell us the market is oversold. As already mentioned, divergence is another aspect of the MFI.

Pros	Cons
✅ Unique, versatile oscillator	❌ Volume isn’t relevant in all markets
	❌ Less effective in range-bound conditions

Average Directional Index

The Average Directional Index (ADX) is another non-directional volatility indicator like the Average True Range. However, it’s slightly more advanced since it measures a trend’s strength. Interestingly, the ADX is another of Wilder’s creations.

The ADX comprises his positive and negative directional indicators and a smoothed 14-day moving average on a 0-100 line graph. Below are the conclusions we derive based on readings from the ADX. 

• ADX below 20: non-trending market
• ADX crosses above 20: emerging new trend
• ADX between 20 and 40: confirmation of an emerging trend
• ADX above 40: strong trend
• ADX crosses 50: extremely strong trend
• ADX crosses 70 (rare occurrence): ‘power trend’ 

Traders also use interesting strategies with the ADX, like the so-called ‘Holy Grail’ (using a 20-day exponential moving average) and breakouts.

Pros	Cons
✅ Straightforward	❌ Non-directional
✅ Measures trend strength	❌ Less effective in ranging markets
✅ More versatile than ATR

Accumulation/Distribution

Finally, let’s end with the volume indicator, the Accumulation/Distribution developed by Marc Chaikin (who happens to have their money flow index). This tool reflects whether traders are accumulating (buying) or distributing (selling) within a certain traded asset. The ADX uses similar concepts to money flow linked to open and closing prices.

Traders use the A/D index in several ways. The first revolves primarily around trend identification, where a rising slope indicates an uptrend while a declining one implies a downtrend.

The A/D also presents divergent opportunities. A reversal may be on the cards when the A/D index rises while the market drops, and vice versa. 

Pros	Cons
✅ Simple to use	❌ Less commonly used volume tool
✅ Provides interesting divergence set-ups	❌ Offers little data for proper analysis

Combination of Technical Indicators

The main downside of all indicators is their lagging nature. So, it becomes inevitable that traders must combine one or more for their trading strategies. Needless to say, the combinations are countless. However, we and many other experts will tell you that only you need to learn a few.

The purpose is to choose indicators that offer different aspects instead of the same thing. Utilizing the RSI and stochastics at the same time is pointless because they both deal with momentum. Many fusions typically include a trend and momentum indicator since these are two of the most crucial technical analysis concepts.

Finally, we suggest sticking to two indicators along with general charting like trend lines, channels, support and resistance lines, etc.

The aim of merging indicators is to determine: 

• The market condition (is it trending or ranging)
• Area of value
• Entry trigger
• Trade management

We also want to achieve confluence. This means that the indicators offer the same signals or triggers, increasing the success rate of our trades.

Let’s study a few effective indicator combinations and how they work.

Moving Averages + RSI

We already know how to figure out the trend with the MAs. However, the next step is determining the best place to enter (area of value). Generally, traders look for retracements on the MA, where the latter acts as ‘dynamic’ support and resistance. 

You’ll keep your eye on certain candlesticks or price action patterns like pin bars that show rejection, suggesting the likelihood of a trend continuation. 

The RSI can be the confluent point. Traders will look for moments when the indicator moves from 70 back down to 30 back up. This would imply the momentum against the trader isn’t as strong, making it a more favorable trigger. Some traders may wait for the RSI to reach 50. 

Lastly, there are several trade management techniques to consider with an MA-RSI duo:

• Traders can exit once the market confidently goes below or above the MA (implying a potential trend change).
• They may also consider exiting when the RSI moves out of the overbought or oversold zones after their entries.

RSI + Bollinger Bands

Traders can implement these tools to trade reversals (although trend continuation set-ups also work). The RSI would show divergence, while the Bollinger Bands would present a moment when the market is moving outside the upper or lower bands. 

Having both situations happen concurrently is quite rare, meaning the RSI-Bollinger Bands combo may prove beneficial. 

The divergence would suggest a trend change that aligns with how the price often travels in the opposite direction after it has moved outside the upper or lower bands.

Traders may decide to enter immediately after this moment or wait for the

• Price to move higher or lower than the middle band
• RSI to move above or below 50

Trade management techniques for this combination would involve exiting once the price moves outside the upper/lower bands or the RSI reverses from overbought/oversold.

Stochastics + ADX

Traders can combine stochastic crossovers and ADX readings for trading signals. We know that a bullish crossover on stochastics is a bullish sign. This can be further confirmed by considering an entry once the ADX is above 50, suggesting that the current trend is now strong.

An indicator like the moving averages is also necessary to confirm the trend, while the stochastics and ADX act as entry triggers.

Traders can look to exit when the ADX is below, or an opposite crossover occurs on the stochastics.

ATR + Fibonacci

We’ve spoken about how the ATR is non-directional. Yet, it can identify strong support and resistance levels, which we can use for several market conditions. The inclusion of the Fibonacci tool would help mainly with the entry.

Support and resistance is often accompanied with little volatility. The idea is that buyers and sellers are deciding whether to reach a new high or low, representing a period of indecision. 

For instance, a traded asset may touch the same resistance multiple times while the ATR shows more or less the same readings over that period. However, the scenario changes when it reads much higher while the market makes a noticeable move lower. This would be accompanied by higher volatility, indicating clear intention from the bears.

With this confirmation, traders can enter the trade once the market retraces to a Fibonacci level.

Traders have more freedom with their trade management using the ATR-Fib mix. Yet, the Fibonacci extensions can provide profit targets as potential exit points. 

Can You Trade Without Indicators?

Indeed, it’s possible to trade the markets without indicators. This is known as ‘naked’ trading or, more specifically, price action trading. Such a method involves analyzing charts by looking at the structures of candlesticks without any indicators. 

Price action traders observe individual candles and particular candlestick patterns (Hanging Man, Shooting Star, etc.) to gauge the potential market direction. Their analysis will also incorporate trend lines, channels, and support and resistance levels.

Even with these graphic tools, price action offers less messy charts compared to those with indicators. Thus, many consider it a better form of technical analysis than the latter. However, this isn’t completely true.

Ultimately, price action and indicators are highly subjective methods open to different interpretations. Secondly, price action doesn’t offer more predictive ability than its counterpart – it also lags.

Understanding the basics of price action and what certain patterns mean in the markets helps immensely. Yet, price action doesn’t offer key elements that indicators present, like momentum, volatility, and trend. 

The 101 of technical analysis is not to put all your eggs in one basket. It’s crucial to use multiple confirmation factors. However, it shouldn’t be to the point of over-optimizing. Traders should strike a reasonable balance where they can combine price action, indicators, and other triggers in their decision-making. 

Learn to Use Technical Indicators With Witzel Trading

Witzel Trading is an engaging learning platform that offers courses for trading the financial markets and tutorials about all the indicators discussed here. It appeals to new and experienced traders, who can also get coaching.

Conclusion

Many traders can quickly go down a rabbit hole in exploring the seemingly countless indicators available. Hence, we’ve provided the ten best to simplify the search. Despite their benefits, indicators each have the same lagging issue.

Thus, traders should find their best indicator combination or other unique ways of combining different signals for optimal results.

Frequently asked questions on Technical Trading Indicators: