Stock Investment Must-Learn: Master 9 Technical Indicators and 4 Core Tools Explained

How Technical Analysis Tools Assist Investment Decisions

When investing in stocks, the main analysis dimensions are divided into two categories: fundamental analysis (company performance, earnings per share, P/E ratio) and technical analysis. Technical analysis includes K-line chart analysis and technical indicators derived through mathematical formulas.

The core value of technical indicators lies in enabling investors to quantify past price and volume data, presenting them visually through line or bar charts to help judge market trends and optimal entry and exit points. Unlike fundamental analysis, technical indicators emphasize short- to medium-term price fluctuation patterns, allowing investors to more敏ly capture market opportunities.

This article systematically introduces commonly used technical indicator systems, guiding investors to establish a comprehensive understanding framework for technical analysis.

In-Depth Analysis of the 4 Most Commonly Used Technical Indicators

Moving Average Line: The Most Intuitive Trend Judgment Tool

The moving average line (MA) is the most widely used technical analysis tool in the market. Its principle is: sum the closing prices of the past N days and divide by N to obtain the average transaction price for that period. By comparing moving averages of different timeframes, investors can clearly determine the strength or weakness of the market.

Calculation formula: N-day Moving Average = Sum of closing prices over N days ÷ N

For example, the 5-day MA is the average closing price over the past 5 days; the 60-day MA represents the average purchase cost over the past two months.

In application, short-term traders typically refer to 5-minute, 15-minute, or 30-minute K-lines combined with 5-day or 10-day MAs; long-term investors often use daily or weekly K-lines combined with 20-day or 60-day MAs to determine the overall direction.

Core judgment logic: When the stock price consistently runs above the MA, it indicates a bullish trend, and investors may consider buying on dips; conversely, if the price remains below the MA, the market is bearish, and caution should be exercised or exit points sought.

Shorter timeframes lead to more volatile price movements; longer timeframes produce smoother trend lines, which is why long-term investors tend to prefer longer-period MAs.

Relative Strength Index (RSI): A Powerful Tool to Measure Overbought and Oversold Conditions

The RSI indicator is presented as a single blue curve, calculated by comparing the average gains and losses over a certain period. Its range is fixed between 0 and 100. Due to its simplicity and logical clarity, RSI is a popular first-choice technical indicator for many novice investors.

Calculation formula: RSI = Average gain over N days ÷ (Average gain + Average loss over N days) × 100

Critical threshold interpretation:

• When RSI > 70, the market enters overbought territory, and the price may be overheated, risking a pullback
• When RSI < 30, the market enters oversold territory, indicating strong selling pressure and an increased chance of rebound

Advanced applications include observing the golden cross and death cross between RSI of different periods. When the short-term RSI (green line) crosses above the long-term RSI (red line), it signals a potential strong upward move, an ideal buy signal; conversely, if the short-term RSI crosses below the long-term RSI, it indicates a continuing downtrend, and investors should consider reducing positions or stop-loss.

( MACD (Moving Average Convergence Divergence): The Expert in Catching Trend Reversals

MACD is derived by subtracting two exponential moving averages (EMA) of different periods. Compared to simple moving averages, it emphasizes recent prices more heavily, making it more敏 to market changes. The indicator includes three components: the fast line (DIF), the slow line (MACD line), and the histogram.

Calculation logic:

• Fast line (DIF) = Short-term EMA - Long-term EMA
• Signal line (MACD line) = EMA of DIF
• Histogram = DIF - MACD line

Trading signal interpretation:

When the fast line crosses above the slow line, and the histogram shifts from negative to positive, it forms a golden cross, indicating increasing bullish momentum and a good time to go long. The height of the histogram reflects the strength of the upward move—the longer the bars, the stronger the bullish force.

Conversely, when the fast line crosses below the slow line, and the histogram shifts from positive to negative, it forms a death cross, signaling a bearish trend and a potential exit or reversal point. MACD is particularly suitable for medium-term traders, as it can提前 detect trend reversals.

) Stochastic Oscillator (KD): A Precise Tool for Identifying High and Low Points

The KD indicator consists of K (fast line) and D (slow line), mainly used to predict the relative high and low points of the market. K reacts quickly, D reacts more slowly; using both together enhances accuracy.

Calculation formulas:

• RSV = (Today’s closing price - Lowest low over N days) ÷ (Highest high over N days - Lowest low over N days) × 100%
• K = RSV + previous K × (N-1) ÷ N
• D = K + previous D × (N-1) ÷ N

Overbought and oversold interpretation:

• KD > 80: Market is overbought, with a high probability of continued rise but also potential profit-taking risk
• KD < 20: Market is oversold, with a high chance of rebound, suitable for entry

Crossover signals:

In oversold zones (KD < 20), if K crosses above D, it indicates a bottom reversal and a good low-entry point. Conversely, in overbought zones (KD > 80), if K crosses below D, it suggests a potential top and a possible decline, prompting reduction or profit-taking.

Complete Classification System of Technical Indicators

Trend Indicators: Assess Market Direction

Trend indicators help investors determine the future bullish or bearish direction of stock prices.

Bollinger Bands consist of three green solid lines, with the middle line as the basis, and upper and lower bands representing the volatility range. Investors can predict potential reversals based on whether prices approach the upper or lower band, indicating overextension or impending reversal.

Oscillator Indicators: Find Turning Opportunities

These indicators analyze the high and low fluctuations within specific ranges to identify overbought or oversold conditions, revealing potential turning points.

In addition to RSI, MACD, and KD, other oscillators include:

Williams %R: Similar to KD, ranges from 0 to 100. By observing the distribution of the highest and lowest prices, it helps determine overbought or oversold states.

CCI (Commodity Channel Index): No fixed range; mainly used to spot divergences with price. When prices continue rising but CCI fails to follow, or prices fall while CCI weakens, these divergences often signal trend reversals.

ATR (Average True Range): Measures market volatility. Rising ATR indicates increasing volatility; falling ATR suggests decreasing volatility. Many use ATR to set stop-loss points but should not rely on it alone, instead combining with other indicators.

( Volume Indicators: Assess Market Participation

Volumes indicator visually displays current trading volume data. Increasing volume indicates higher market participation and active trading; decreasing volume suggests waning interest. Confirming price trends with volume increases adds credibility.

Golden Rules for Using Technical Indicators

) Advantages of Indicators: Easy to Learn and Use

The core advantage of technical analysis tools is their low threshold and straightforward logic, enabling new investors to quickly build basic analysis skills and rapidly identify market trends and entry/exit points. Compared to fundamental analysis, which requires interpreting大量财务报表, technical indicators only need chart observation to make decisions.

( Limitations of Indicators: Lagging and Risk of Failure

However, investors must recognize that technical indicators are based on historical price data, inherently lagging behind real-time market movements. This lag can cause signals to be delayed, potentially missing the optimal entry point. Additionally, during extreme market volatility (e.g., sudden negative news), indicator parameters may become less reliable or even失灵.

) Best Practices: Multi-Indicator Collaboration

Investors should avoid relying solely on a single indicator for decision-making. A more prudent approach includes:

1. Combining Indicators: Use trend indicators (moving averages) with oscillators (RSI, MACD, KD) — trend indicators determine the overall direction, oscillators identify entry points
2. Multi-Dimensional Confirmation: Consider fundamental data (company performance, industry outlook) and market information (policy changes, capital flows)
3. Dynamic Adjustment: Flexibly adjust indicator parameters and interpret signals based on market environment

Only through such integrated analysis can one significantly reduce the risk of indicator failure and improve investment success rates.

Quick Reference: 9 Indicator Comparison Table

Summary

Stock technical indicators are essential tools for investors. Mastering the four core indicators—moving averages, RSI, MACD, and KD—is sufficient for most trading scenarios. However, the biggest pitfall of technical analysis is over-reliance, neglecting fundamental factors and market environment changes.

True trading experts use technical indicators as辅助 tools while developing independent judgment based on market understanding. Adhering to multi-indicator confirmation and multi-dimensional analysis is the correct way to reduce losses and achieve stable gains.