Technical indicators: moving averages, RSI, MACD, Bollinger and ATR

Indicators are mathematical formulas applied to price. They don't add new information: they reprocess what price has already done to show you trend, momentum or volatility in a more readable way. They're useful if you know what they measure; they're dangerous if you use them as magic traffic lights ("RSI below 30 = buy!"). In this lesson you learn the main ones and, above all, when not to trust them.

Golden rule: indicators lag

Almost all indicators lag: they're calculated from past price, so they confirm what has already happened. They don't predict the future. They can help you decide, but they don't replace reading the structure (trend, support, resistance) you saw in the earlier lessons.

They fall into three families, and one per family is enough:

• Trend: tell you direction (moving averages).
• Momentum: measure the strength of the move (RSI, MACD, stochastic).
• Volatility: measure the size of the moves (ATR, Bollinger Bands).

Using three indicators from the same family means seeing the same thing three times.

Moving averages (MA)

A moving average is the average price of the last n periods: it smooths oscillations and shows direction.

• SMA (simple): arithmetic average. Slower.
• EMA (exponential): gives more weight to recent prices. More reactive.

The most used periods: 20, 50, 100, 200. The 200-period average is considered the "long-term" boundary.

How they're used:

1. Trend filter: price above the 50/200 average = bullish context; below = bearish.
2. Dynamic support/resistance: in trends price often pulls back toward the average (for example the 20 or 50 EMA) and moves on from it.
3. Crossovers: when the fast average crosses above the slow one (for example EMA 20 above EMA 50) it's called a bullish crossover. It works in trends, but in ranges it produces lots of false signals.

RSI (Relative Strength Index)

The RSI oscillates between 0 and 100 and measures the speed and size of recent gains relative to losses (usually over 14 periods). The classic convention:

• Above 70: overbought (price has risen very fast).
• Below 30: oversold (it has fallen very fast).

The big mistake is reading them as "sell above 70, buy below 30". In a strong trend the RSI can stay above 70 for days while price keeps rising. Overbought doesn't mean "about to fall": it means "rising with force".

More sensible uses:

• In ranges: the 70/30 levels can signal real exhaustion.
• In trends: the 40-50 area in an uptrend (or 50-60 in a downtrend) often works as a pullback zone where to look for entries in the trend's direction.
• Divergences: if price makes a new high but the RSI doesn't, momentum is weakening. It's a warning, not a signal.

MACD

The MACD compares two exponential moving averages (usually 12 and 26 periods) and shows: the MACD line (the difference between the two), the signal line (an average of the MACD, usually 9 periods) and the histogram (the difference between the two lines).

• MACD line above zero: bullish momentum; below: bearish.
• MACD/signal crossover: indicates a change of momentum, with the same limits as other crossovers.
• Like the RSI, it's useful for divergences.

Bollinger Bands

They're a moving average (usually 20 periods) with two bands at 2 standard deviations above and below. They widen with volatility and narrow in calm moments.

• Squeeze: calm before the storm; it often precedes an expansion, without indicating direction.
• Price at the upper band: in ranges it can signal an extreme; in a strong trend price can "walk" along the band.

ATR (Average True Range)

The ATR measures the average volatility of candles (usually over 14 periods), in pips. It doesn't give direction: it tells how much price moves. It's probably the most useful indicator for risk management:

• Stop distance: a stop of 1.5-2 times the ATR avoids being hit by normal noise.
• Comparing instruments: GBP/JPY has a much higher ATR than EUR/USD, so it requires wider stops and smaller sizes.
• Filter: if the ATR is very low, the market is standing still and may not be worth trading.

How to combine indicators

An example of an orderly combination, one per family:

1. Trend: 50 EMA (or 200). Price above = I look only for buys.
2. Momentum: 14 RSI. I wait for it to drop toward 40-50 in a pullback and turn back up.
3. Volatility: ATR for stop and target.

All together with support/resistance levels read on the chart. Note the order: first structure, then indicators as confirmation.

See the indicators at work

The chart below already has an exponential moving average, the RSI and the ATR. You can change their parameters with the gear icon on the indicator (for example EMA 50 and RSI 14). Observe: in trends does price pull back toward the average? Where is the RSI when price moves off? What is the ATR in the quietest hours?

Which indicators to avoid (at first)

• Ones you don't understand: if you don't know how it's calculated and what it measures, don't use it.
• "Miraculous" paid indicators with suspicious win rates.
• Overlaps: three oscillators together say the same thing.

In short

• Indicators reprocess past price: they lag and don't predict.
• One per family is enough: trend (moving averages), momentum (RSI/MACD), volatility (ATR/Bollinger).
• RSI overbought/oversold doesn't mean "reversal" in strong trends.
• The ATR is precious for choosing stop distance and comparing instruments.
• First price structure, then indicators as confirmation.

Practical exercise

1. Put a 50 EMA and a 14 RSI on EUR/USD H1. For a week note how many times price pulled back to the EMA and what happened.
2. Calculate the ATR of three pairs and compare stop and size for the same risk.
3. Look for an RSI divergence and check what price did next.