Top 5 Technical Indicators for Traders & Investors
Top 5 Technical Indicators for Traders & Investors
The top 5 technical indicators every trader and investor should know are Volume, Moving Averages, the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and the Volume-Weighted Average Price (VWAP). There is no shortage of indicators out there, but these five answer the questions that matter most: how much conviction is behind a move, which way the trend is pointing, whether momentum is stretched, and where price is likely to find balance. Below is a plain-English guide to each one, with the same charts and infographics our traders use.
Volume confirms conviction, moving averages define the trend, RSI and MACD measure momentum, and VWAP anchors intraday price. Used together rather than in isolation, these five technical indicators turn a noisy chart into a readable story.
What Is Trading Volume and Why Does It Matter?
Volume is the number of shares traded in a given period, and it tells you how much conviction is behind a price move. It is the foundation every other indicator builds on, which is why it is first on this list. When a stock rises on increasing volume, the move is generally viewed as healthy and strong. When it falls on increasing volume, the trend is gathering strength to the downside.
- Volume is displayed as red and green bars beneath the price. The bars line up with the candlestick directly above them.
- It is a direct read on market strength. Rising price on rising volume signals real demand, not just noise.
- Stocks with more daily volume have more liquidity, so they move more freely and it is easier to get in and out of a position.
- When price falls on increasing volume, sellers are in control and the downtrend is gaining momentum.
Volume also helps you separate moves worth trading from moves worth ignoring. The three scenarios below are the ones that come up most often, and learning to read them quickly is one of the fastest ways to filter out low-quality setups.
- Low volume move: few traders are involved, so the move has a lower chance of continuing.
- High volume move: lots of traders are involved, the move has a better chance of holding, and it is easier to find a buyer or seller.
- Volume spike on an established trend: a sudden surge after a long run can signal that the trend is about to change.
Never read volume in a vacuum. Pair it with price. A breakout backed by heavy volume is far more trustworthy than the exact same breakout on light, fading volume. For the textbook definition and history, see Investopedia's overview of volume.
What Are Moving Averages (SMA vs EMA)?
Moving averages smooth out price action so the underlying trend becomes obvious. Next to volume, they are the most common indicator traders put on a chart. They are also excellent at revealing dynamic support and resistance. You will often see the 200-day moving average act as a floor or ceiling across a stock's history.
A moving average takes the mean of a set of prices over a defined number of days. The infographic shows three of the most useful: the 13 MA for recent, intraday-style action, the 50 MA as the first major line of trend support or resistance, and the 200 MA for the long-term health of a stock.
Both the Simple Moving Average (SMA) and the Exponential Moving Average (EMA) measure the trend over time and smooth out short-term price fluctuation. The difference is in how each one is calculated, and that difference changes how you use them.
In short, the SMA gives you a calmer read on the bigger trend, while the EMA hugs price more closely and reacts faster to fresh moves. Many active traders lean on the EMA for that reason. For a full walkthrough with chart examples, read our SMA vs EMA deep dive, or the broader Investopedia moving average guide.
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See How We Break Down TradesWhat Is the Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is a momentum indicator that measures whether an asset is overbought or oversold. It moves on a scale from 0 to 100 and helps you anticipate where bullish or bearish pressure may be building.
A reading of 70 or higher is generally considered overbought (buyers may be stretched). A reading of 30 or lower is considered oversold (sellers may be exhausted). These are zones to investigate, not automatic buy or sell buttons.
- RSI is a momentum gauge for the overbought and oversold condition of a stock at any moment.
- The scale runs from 0 to 100 at the extremes.
- Most traders treat 30 and below as oversold and 70 and above as overbought.
- It helps you judge the bullish or bearish pressure that may be coming next.
On the AAPL chart below, the RSI is the purple line in the lower panel. Notice how it held in overbought territory (above 70) through the rally before cooling off, and how it sprang back up after dipping into oversold (below 30).
RSI bounces back and forth between oversold and overbought across the life of a stock as it trades within its larger trend. The skill is reading those swings in context. For a step-by-step method, see our guide on how to use RSI and the Investopedia RSI reference.
Indicators describe probability, not certainty. In a powerful trend, RSI can stay overbought or oversold for weeks while price keeps running. Treat an extreme reading as a reason to look closer, confirm with price and volume, and always define your risk before you act.
What Is MACD (Moving Average Convergence Divergence)?
MACD (Moving Average Convergence Divergence) blends trend and momentum into one tool, which is why it is one of the most widely used indicators in technical analysis. It is built from two moving averages and a signal line.
- When the signal line and the MACD line move toward each other, that is "converging." When they pull apart, that is "diverging."
- The three most common MACD strategies are crossovers, histogram reversals, and zero-line crosses.
- It works on any timeframe, which is why so many traders keep it on their charts. We map ours with TradingView.
The MACD Makeup
Signal Line: a 9-day EMA of the MACD, plotted alongside it to flag turns in the indicator.
MACD Line: the 12-day EMA minus the 26-day EMA, calculated from closing prices.
Histogram: measures the distance between the MACD line and its signal line. Like the MACD, it fluctuates above and below the zero line, expanding as momentum builds and contracting as it fades.
A crossover carries more weight when it lines up with other signals. A bullish MACD cross that happens as price reclaims a key moving average, on rising volume, is a far stronger cue than a crossover on its own. Background on the math is in the Investopedia MACD guide.
What Is VWAP (Volume-Weighted Average Price)?
VWAP (Volume-Weighted Average Price) is the average price of a stock across the day, weighted by volume. It is one of the most popular tools for day traders and a benchmark that large institutions watch closely. On a chart it looks similar to a moving average, but the volume weighting is what sets it apart.
Because it is weighted by volume, the time periods where the most shares change hands pull VWAP toward them the hardest.
Both retail and professional traders use VWAP to navigate intraday trends. Price trading above VWAP is generally read as bullish for the session, and below it as bearish, and price often gets pulled back toward VWAP like a magnet.
Take the 5-minute chart of BBIG below. VWAP repeatedly acts as intraday support and resistance. The black background marks regular trading hours and the blue background marks extended hours (pre-market and post-market).
There is a vast number of ways traders combine these indicators to guide their decisions successfully, and this guide only scratches the surface. Dig deeper with our breakdown of popular technical indicators and the Investopedia VWAP reference.
Frequently Asked Questions
What are technical indicators and why do traders use them?
Technical indicators are calculations based on price, volume, or both that help you read market behavior and spot potential setups. They give you a framework to gauge trend strength, momentum, and likely support or resistance. If you want the foundation first, start with our breakdown of what technical indicators are.
What is the difference between a Simple and an Exponential Moving Average?
The Simple Moving Average (SMA) weighs every price in the lookback period equally, while the Exponential Moving Average (EMA) gives more weight to recent prices. That makes the EMA react faster, which many traders prefer on shorter timeframes. See the full comparison in our SMA vs EMA guide.
How do you read RSI for overbought and oversold conditions?
RSI runs from 0 to 100. A reading of 30 or below is generally oversold and 70 or above is generally overbought. Treat these as signals to investigate, not automatic buy or sell triggers, and confirm with price and volume. Our guide on how to use RSI walks through the full method.
Why does volume matter when reading a chart?
Volume shows the conviction behind a move. A trend advancing on rising volume is generally healthier and more likely to continue, while a move on light volume is weaker. A sudden volume spike after an established trend can also warn that the trend is about to change.
Which technical indicator should I learn first?
There is no single best indicator. They work best in combination, confirming one another, such as pairing volume with a moving average and RSI. For a wider view, see our roundup of the best trading indicators and find the mix that fits your style.
Do technical indicators work on their own?
No. Every indicator can give false signals in isolation. The traders who get the most out of them stack two or three that measure different things (trend, momentum, and participation) and only act when they agree. Indicators support your read of price action, they do not replace it.
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