Introduction to Stock Technical Analysis: 4 Key Indicators to Instantly Understand Market Trends

Why Learn Technical Indicators?

When investing in stocks, fundamental and technical analysis are two powerful tools. Fundamentals focus on a company’s operating data, while technical analysis relies on price movements and technical indicators. Stock technical analysis indicators are like a toolbox that transforms historical price data into visual charts using formulas, helping you quickly judge market trends and optimal buy or sell points.

Compared to candlestick analysis, technical indicators have the advantage of low entry barriers and intuitive understanding, making them especially suitable for beginners. However, it’s important to note that indicators are based on past data and may have a lagging effect. It’s best not to rely solely on one indicator but to combine multiple tools and fundamental analysis for comprehensive judgment.

How Are Stock Technical Analysis Indicators Classified?

Common stock technical analysis indicators are divided into three main categories:

Trend Indicators: Determine the future direction of the market and predict bullish or bearish trends

• Bollinger Bands: Composed of three green lines that move with the candlesticks, used to observe volatility and trend
• Moving Averages: The most commonly used indicator; prices above the moving average indicate a bullish trend, below suggest a bearish trend

Oscillator Indicators: Identify highs, lows, and turning points based on price ranges

• RSI, MACD, KD, Williams %R, CCI, ATR, etc.

Volume Indicators: Assess market activity through trading volume

4 Core Indicators You Must Know in Practice

1. Moving Average (MA) — Easiest to Get Started

Calculation logic is simple: N-day moving average = sum of closing prices over N days ÷ N

For example, a 5-day moving average is the sum of the past 5 days’ closing prices divided by 5. Short-term moving averages are more volatile, while long-term ones tend to be smoother.

How to use? Choose a time period based on your trading habits:

• Short-term traders: Use 5-minute or 15-minute K-lines combined with 5-day or 10-day moving averages
• Medium to long-term investors: Use daily or weekly K-lines with 20-day or 60-day moving averages

Key judgment: If the price stays above the moving average → bullish market, consider buying; if below → bearish market, exercise caution

2. Relative Strength Index (RSI) — Friendly for Beginners

RSI is represented by a blue curve, ranging from 0 to 100, and is a helpful tool for judging price momentum.

Calculation formula: RSI = (Average of recent N days’ gains) / (Average of gains + losses) × 100

Key values:

• RSI > 70: Overbought zone, market may be overheated, watch for potential decline
• RSI < 30: Oversold zone, sellers dominate, potential rebound, watch for buy signals

Advanced usage: Observe crossovers between two RSIs of different periods

• Short-term RSI crossing above long-term RSI = Golden Cross (buy signal)
• Short-term RSI crossing below long-term RSI = Death Cross (sell signal)

( 3. MACD (Moving Average Convergence Divergence) — Detect Trend Reversals

A long-standing and practical indicator composed of the fast line (DIF), slow line (MACD), and histogram.

Core principle: Subtract two exponential moving averages (EMAs) of different periods to get the divergence (DIF), then smooth this divergence to produce the MACD.

Compared to simple moving averages, EMAs give more weight to recent prices, making MACD more sensitive to recent price changes.

How to interpret?

• When the fast line > slow line, and histogram is above zero → bullish
• When the fast line < slow line, and histogram is below zero → bearish
• Fast line crossing above slow line = Golden Cross (bullish signal)
• Fast line crossing below slow line = Death Cross (bearish signal)

) 4. Stochastic Indicator (KD) — The Expert in Spotting Highs and Lows

Composed of K (fast line) and D (slow line), designed to predict market highs and lows. K reacts quickly, D reacts more slowly.

Calculation formulas:

• RSV = (Current close - N-day lowest low) / (N-day highest high - N-day lowest low) × 100%
• K = RSV + previous K × (N-1)/N
• D = K + previous D × (N-1)/N

Typically, N is 9 or 14 days, but adjust according to your trading cycle.

Range judgments:

• Both K and D > 80: Overbought, market is strong, may continue upward
• Both K and D < 20: Oversold, market is weak, may enter a downtrend
• K crossing above D in oversold zone = Golden Cross (buy signal)
• K crossing below D in overbought zone = Death Cross (sell signal)

Other Commonly Used Indicators Overview

What to Watch Out for When Using Technical Indicators?

1. Lagging Effect: Indicators are based on past data and may miss optimal entry or exit points
2. Reduced Effectiveness in Volatile Markets: Extreme market conditions can invalidate indicator parameters
3. Avoid Relying on a Single Indicator: It’s best to consider multiple tools and fundamental info
4. Regularly Test and Adjust: Continuously optimize parameters based on actual trading results

Summary

Mastering stock technical analysis hinges on understanding the logic behind indicators, not just mechanically reading numbers. Moving averages are easiest for beginners, RSI and KD are friendly entry points, and MACD is suitable for identifying medium-term trend reversals.

Using 2-3 indicators in combination yields better results. For example, use moving averages to determine the main trend, RSI or KD to spot overbought/oversold conditions, and MACD to confirm reversals. But most importantly—remember that technical indicators are just tools; solid investment decisions should be based on thorough fundamental analysis and risk management.