ASAmol Shukla
55 mins lesson duration•11 mins read

Lesson 2: Technical Indicators — Moving Averages, RSI & MACD

Learn the most widely-used technical indicators to identify trends, momentum, and overbought/oversold conditions.

What Are Technical Indicators?

Technical indicators are mathematical calculations based on price, volume, or open interest. They help traders identify trends, momentum, volatility, and potential reversal points.

Mental model: Indicators are like dashboard gauges in a car — they don't tell you where to drive, but they tell you how fast you're going, how much fuel you have, and whether the engine is overheating.

Types of Indicators

Category Purpose Examples
Trend Identify direction Moving Averages, ADX
Momentum Measure speed of change RSI, MACD, Stochastic
Volatility Measure price fluctuation Bollinger Bands, ATR
Volume Confirm trends with volume OBV, Volume Profile

Moving Averages — The Foundation

A Moving Average (MA) smooths out price data by creating a constantly updated average price over a specific period.

Types of Moving Averages

Type Calculation Characteristics
SMA (Simple) Equal weight to all periods Smooth, slower to react
EMA (Exponential) More weight to recent prices Responsive, faster signals

Common Moving Average Periods

Period Name Use Case
9/10 EMA Short-term Scalping, day trading
20 EMA Short-term Swing trading, dynamic support
50 SMA Medium-term Trend confirmation
100 SMA Medium-term Major trend direction
200 SMA Long-term Bull/bear market filter

Moving Average Crossover Strategy

Signal Description Action
Golden Cross 50 MA crosses above 200 MA Bullish — consider buying
Death Cross 50 MA crosses below 200 MA Bearish — consider selling

Key insight: Moving averages are lagging indicators — they confirm trends but don't predict them. Use them with other tools, not in isolation.

RSI (Relative Strength Index)

RSI measures the speed and magnitude of recent price changes to identify overbought or oversold conditions.

RSI Formula Concept

RSI = 100 - (100 / (1 + RS))

Where RS = Average Gain / Average Loss over the period (typically 14 days)

RSI Interpretation

RSI Value Condition Potential Action
Above 70 Overbought Consider selling or waiting for pullback
50-70 Bullish momentum Hold or look for buy opportunities
30-50 Bearish momentum Be cautious, wait for confirmation
Below 30 Oversold Consider buying or watching for reversal

RSI Divergence (Advanced Signal)

Divergence Type Price Action RSI Action Signal
Bullish Divergence Price makes lower low RSI makes higher low Potential reversal up
Bearish Divergence Price makes higher high RSI makes lower high Potential reversal down

MACD (Moving Average Convergence Divergence)

MACD shows the relationship between two moving averages of a stock's price.

MACD Components

Component Description Typical Settings
MACD Line 12 EMA - 26 EMA Fast line
Signal Line 9 EMA of MACD Line Slow line
Histogram MACD Line - Signal Line Shows momentum

MACD Signals

Signal Description Meaning
Bullish Crossover MACD crosses above Signal Buy signal
Bearish Crossover MACD crosses below Signal Sell signal
Zero Line Cross MACD crosses above/below 0 Trend change
Histogram Growing Bars getting larger Momentum increasing
Histogram Shrinking Bars getting smaller Momentum fading

Combining Indicators — The Power of Confluence

The best trading signals come when multiple indicators agree:

Confluence Setup Indicators Signal Strength
Trend + Momentum 50 MA up + RSI > 50 Strong buy
Support + Oversold Price at support + RSI < 30 High-probability buy
Resistance + Overbought Price at resistance + RSI > 70 High-probability sell
Crossover + Volume MA crossover + high volume Confirmed signal

Mental model: Think of confluence as a jury — one indicator alone might be wrong, but when multiple indicators agree, the verdict is much more reliable.

Common Mistakes to Avoid

  • Mistake: Using too many indicators — Fix: Stick to 2-3 that complement each other.
  • Mistake: Using lagging indicators for prediction — Fix: Use them for confirmation, not prediction.
  • Mistake: Ignoring the trend — Fix: Always know the bigger picture before trading indicators.
  • Mistake: Over-optimizing indicator settings — Fix: Default settings work well for most situations.

Professional Tips & Tricks

  • RSI works best in ranging markets; MACD works best in trending markets.
  • Moving averages are dynamic support/resistance — watch for bounces.
  • Divergences are early warning signals but require patience to play out.
  • Always check the daily chart before trading on shorter timeframes.

Key Takeaways

  • Moving averages smooth price data and identify trend direction.
  • RSI measures momentum and identifies overbought/oversold conditions.
  • MACD shows trend changes through line crossovers and histogram analysis.
  • Combine multiple indicators for stronger signals (confluence).
  • No single indicator is perfect — use them as part of a complete system.

Next up: Volume analysis and trade entry/exit strategies.

Interactive Lesson Code Snippet
# Technical Indicators Cheat Sheet

## Moving Average Settings

SMA (Simple Moving Average):
- Short-term: 10, 20 periods
- Medium-term: 50, 100 periods
- Long-term: 200 periods

EMA (Exponential Moving Average):
- Short-term: 9, 12 periods
- Medium-term: 26 periods
- Signal line: 9 period EMA of MACD

## RSI Calculation (14-period)

RSI = 100 - (100 / (1 + RS))
RS = Avg Gain / Avg Loss

Interpretation:
- RSI > 70 → Overbought (sell zone)
- RSI < 30 → Oversold (buy zone)
- RSI = 50 → Neutral

## MACD Formula

MACD Line = 12 EMA - 26 EMA
Signal Line = 9 EMA of MACD Line
Histogram = MACD Line - Signal Line

Signals:
- MACD crosses above Signal → BUY
- MACD crosses below Signal → SELL
- MACD crosses above 0 → Bullish trend
- MACD crosses below 0 → Bearish trend

## Indicator Combo Guide

| Trend + Momentum | Signal |
|------------------|--------|
| 50 MA up + RSI > 50 | Strong Buy |
| 50 MA down + RSI < 50 | Strong Sell |
| Price at Support + RSI < 30 | Buy |
| Price at Resistance + RSI > 70 | Sell |
Language: text

Code Visualization Tips

  • Overlay a 50-day and 200-day moving average on a stock chart and watch for crossovers.
  • Mark overbought (>70) and oversold (<30) zones on the RSI indicator.
  • Watch the MACD histogram grow and shrink to feel momentum changes.

Professional Tips & Tricks

  • RSI works best in ranging markets; MACD works best in trending markets.
  • Use the 200-day MA as a bull/bear filter — only buy above it, only sell below it.
  • Divergences take time to play out — be patient and wait for confirmation.

Python Code Judge & Practice Arena

LeetCode Style

Run real Python 3.12 WebAssembly code directly in your browser against automated test suites.

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Problem 1 of 2

Moving Average Analysis

Medium+20 XP
For any stock, identify: (1) Is price above or below the 50-day MA? (2) Is the 50-day MA above or below the 200-day MA? (3) What does this tell you about the trend?
main.pyPython 3.12 (WASM)
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Press Run Code to test or Submit to verify test cases

Up next · Continue learning

Volume Analysis & Trade Execution

Use volume to confirm trends, identify accumulation/distribution, and execute trades with proper entry and exit strategies.

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Chart Types & Price Action Fundamentals Volume Analysis & Trade Execution
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