The Technical Analysis panel on a ticker page surfaces a handful of indicators that aggregate into a "Buy / Sell / Neutral" reading. Behind that summary are well-defined formulas — most invented decades ago — that each describe one specific aspect of price behaviour. This page covers the five you will run into most often: moving averages, RSI, MACD, Bollinger Bands, and stochastic oscillators. The aim is to make the labels useful, not to recommend a strategy.
Moving averages
A moving average smooths a price series by replacing each price with the average of the previous N periods. Two flavours:
- Simple moving average (SMA): arithmetic mean of the last N closes. Equal weight to each period.
- Exponential moving average (EMA): more weight on recent prices. Reacts faster.
Worked example: a 10-day SMA at the close of Friday is the average of the last ten daily closes including Friday's. Tomorrow it drops Monday-of-last-week and adds today, so it "moves" by exactly one bar.
What people watch them for
- Direction of the line. The slope of a long moving average (50, 100, 200 days) is one of the simplest summaries of trend.
- Price vs. the line. Persistent closes above the 200-day SMA are read as a long-term uptrend; persistent closes below as a downtrend.
- Crossovers. When a shorter average crosses a longer one (the classic "golden cross" / "death cross") it summarises a regime shift in the slow trend, with a delay equal to the indicators' look-back.
Where they mislead
Moving averages lag. By construction, they describe the past N periods, so they always turn after price does. In a sideways market they generate frequent, contradictory crossovers that look profitable in hindsight and aren't in real time.
Relative Strength Index (RSI)
RSI is a momentum oscillator scaled between 0 and 100. The default look-back is 14 periods. It compares the average gain across "up" periods to the average loss across "down" periods within the look-back window. A higher number means the period was dominated by up moves; a lower number means it was dominated by down moves.
What people watch it for
- Overbought / oversold. Conventional thresholds are RSI > 70 (overbought) and RSI < 30 (oversold). These are descriptive labels, not signals to act on alone.
- Divergence. When price makes a new high but RSI does not, momentum is weakening even if the headline number is climbing. The same in reverse for new lows.
Where it misleads
Strong trends can keep RSI above 70 (or below 30) for weeks. "Overbought" is not the same as "expensive" or "about to fall". RSI is most informative in range-bound markets and least informative in strong trends — exactly the opposite of what a beginner expects.
MACD (Moving Average Convergence Divergence)
MACD has three components:
- The MACD line: the 12-period EMA minus the 26-period EMA. Above zero means the short EMA is above the long EMA — i.e., recent momentum is up.
- The signal line: a 9-period EMA of the MACD line. A smoother version of the same signal.
- The histogram: MACD line minus signal line. Crosses zero when the two lines cross.
What people watch it for
- Zero-line crosses as a slow regime indicator.
- Signal-line crosses as a faster, noisier momentum indicator.
- Histogram size and shape as a measure of whether momentum is accelerating or decelerating.
Where it misleads
MACD is two EMAs combined, so all the lag of moving averages is baked in. In choppy markets the histogram flips sign repeatedly, generating "signals" that are largely noise.
Bollinger Bands
Bollinger Bands plot three lines: a moving average (typically a 20-period SMA), an upper band at SMA + 2 × standard deviation, and a lower band at SMA − 2 × standard deviation. They visualise volatility — the bands widen as the market gets more volatile and contract during quiet periods.
What people watch them for
- Band width (the distance between upper and lower) as a volatility regime gauge. A "squeeze" — bands contracting to historically narrow widths — often precedes a sharper move, although not necessarily in the obvious direction.
- Touches of the bands as a sense of where price is statistically extreme, with the same caveat as RSI: trending markets can ride a band for days.
Where they mislead
The "± 2 standard deviations" framing implies a normal distribution. Real returns have fat tails, so multi-standard-deviation moves are more common than the bands suggest. A break of the upper band is not a 2.5%-probability event in practice.
Stochastic oscillator
The stochastic oscillator is also bounded 0 to 100 and is built on the idea that, in an uptrend, closes cluster near the recent high, and in a downtrend, near the recent low. It reports where today's close sits within the high–low range of the last N periods (commonly 14). A %K line is the raw value and a %D line is a short moving average of %K.
What people watch it for
The same two reads as RSI: overbought/oversold zones (typically > 80 / < 20) and bullish or bearish divergences against price.
Where it misleads
Stochastic oscillators are noisier than RSI. They are more responsive — useful in tight ranges, distracting in trends. The "fast" stochastic is rarely worth watching on its own; most platforms default to a smoothed version for this reason.
Common mistakes
- Reading indicators as predictions. Every indicator is a transformation of past price. None of them know the future.
- Stacking redundant ones. RSI, stochastic, and MACD all describe momentum from slightly different angles. Three confirming readings from three momentum indicators is one piece of evidence, not three.
- Ignoring the time frame. An RSI reading on a 5-minute chart and one on a weekly chart say very different things. Match the indicator to the holding period you actually have in mind.
- Tuning parameters until something looks profitable in hindsight. The chart will show you a setup that "worked" for almost any combination of parameters if you look hard enough. Out-of-sample, that combination usually fails.
For the underlying chart conventions these indicators sit on top of, see how to read a stock chart. For the fundamental side of the same ticker — the ratios shown next to the chart — see key financial ratios at a glance.
This page is general educational content and not a recommendation. See the Disclaimer.