Top 5 Technical Indicators for Traders & Investors

Volume, Moving Averages, RSI, MACD, VWAP.

There is certainly no shortage of “technical indicators” that traders will use or come across at some point in their trading career. Having been in the game for many years, our traders have put together a simple guide to understanding the Top 5 Technical Indicators we believe EVERY trader and investor should know.

  1. Volume
  2. Moving Averages
  3. Relative Strength index (RSI)
  4. Moving Average Convergence Divergence (MACD)
  5. Volume-Weighted Average Price (VWAP)

Top Technical Indicator #1 - Volume

Trading Volume, what does it mean? A basic MUST KNOW concept to understand in the world of trading is  trading “volume”. In stocks, volume refers to the number of shares traded during a given period of time. It is commonly displayed in red and green volume bars, hence the name. Volume can be used as an indicator of market strength. Often when stocks go up on increasing volume, markets are viewed as healthy and strong. When prices fall on increasing volume, the trend is gathering strength to the downside. 
  • Volume refers to then number of shares during a given period of time. The yellow arrows in the image are pointing to volume bars, corresponding to the candlestick above it.
  • Volume can be used as an indicator of market strength. Often when stocks go up on increasing volume, markets are viewed as healthy & strong. 
  • Stocks with more daily volume have more liquidity than those without. This means stocks with more volume can move more & it can be easier to enter & exit trading positions.
  • When prices fall on increasing volume, the trend is gathering strength to the downside.
Trading Volume
  • If a stock moves on low volume, it means that few people are trading the price movement and the trend has a lower chance of continuing.
  • If a stock moves on high volume, it means that lots of people are trading the price movement and the trend has a better chance of continuing & it will be easier to find a buyer or someone to sell to.
  • If a trend has already been established for some time & there is a noticeable spike in volume, it may be an indication that the trend is changing.
Volume Essentials

Top Technical Indicator #2 - Moving Averages

Moving Averages

Moving Averages – what are they? Moving Averages (MA), next to volume, are probably the most common technical indicators traders will use on their charts. Moving averages are great at showing support and resistance levels when charting stocks. Often you will see the 200 moving average acting as support or resistance over the price history of a stock.

The definition of Moving Averages in trading is: a calculation that takes the mean of a given set of prices over the specific number of days in the past. (in this example the 3 MAs shows the the previous 13, 50, & 200 days).

Both the Simple Moving Average (SMA) and the Exponential Moving Average (EMA) measure trends over time. The common definition is that these technical indicators are commonly used to smooth out price fluctuation over time. As mentioned previously, it also helps identify support/resistance levels.

The key difference between the SMA & EMA is how their measurement of the trend is calculated. The Simple Moving Average SMA calculates the average price over time as equal values.

The Exponential Moving Average EMA calculates the average of price over time, but gives more weight to recent price action. This means that the more recent price data will weigh more on the average with older price data having less weight. Learn more with our SMA & EMA deep dive blog.

Top Technical Indicator #3 - Relative Strength Index RSI

Relative Strength Index RSI – what is it?

  • This is a momentum indicator used to measure the oversold/overbought conditions of an asset (stock) at any given time.
  • Generally, the RSI will have a measurement range from 0 to 100 at the extremes.
  • Traders typically recognize an RSI measurement of 30 and under as oversold conditions & a measurement of 70 or higher as overbought conditions.

  • When analyzing stocks, this indicator can help traders determine bullish or bearish price action to come.
Relative Strength Index

The RSI indicated on the chart Above is in purple. You can see where the overbought conditions (over 70) sustained through the rally, eventually spilling off. When the RSI hit oversold (under 30), you can see how it reactively trended back up to less oversold conditions.

The RSI measurement will bounce back and forth between oversold and overbought conditions through the life of a stock as it trades in an overall bigger trend.

Top Technical Indicator #4 - Moving Average Convergence Divergence MACD

Moving Average Convergence Divergence MACD –  What is the MACD?

  • The MACD stands for Moving Average Convergence Divergence. The MACD is one of the most commonly used technical analysis tools out there.
  • If the signal line and the MACD line come together, it’s called ‘converging’ and if they are moving away from each other it’s called ‘diverging’ Strategies.
  • 3 of the most common MACD strategies include crossovers, histogram reversals and zero crosses. Btw, we love our trading charts powered by Tradingview!

The MACD Makeup:

Signal Line – The signal line is a 9-day EMA of MACD that is plotted along the side to act as a signal line to identify turns in the indicator.

MACD – The MACD is the 12-day Exponential Moving Average (EMA) minus the 26-day EMA. Closing prices are used to form the MACD’s moving averages.

Histogram – The MACD-Historgram measures the distance between MACD and tits signal line & just like the MACD it fluctuates above/below the zero line.

Top Technical Indicator #5 - Volume-Weighted Average Price VWAP

Volume Weighted Price Average VWAP – How can this help? This is one of the most popular indicators a day trader will use on their charts. Known as a trading benchmark, this provides a measurement of the average price of a stock throughout the day using both volume and price. The VWAP is similar to how a moving average will appear on a chart.

Both retail and professional traders utilize the VWAP for helping identify and navigate intra-day trends. It’s important to remember that the VWAP will be weighted toward the volume. So the more volume that trades in a specific time period, the more weight that time period will get.

Take a look at this 5 minute chart of BBIG. See how the VWAP tends to act as support or resistance intra-day. Below, the black background is regular trading hours and the blue background is extended hours trading. (pre market or post market).

 There’s a vast amount of ways traders can use Technical Indicators to help guide their trading succesfully, and we just barely scratched the surface in this short blog. Check out our Trading Room to learn more about our Education Course where we cover more technical indicators, patterns, analysis & more!  We hope we were able to enhance your trading knowledge when it comes to Technical Analysis. If you have any further thoughts, or Technical Analysis you want to see on this page, use the form below to get in contact with us!

These are tips on how to read and understand the Top Technical Indicators for trading. The more you learn, the more you earn! If you have any questions or comments about these indicators or any other trading subjects, feel free to use the contact form below to get in touch with us.