Professional traders don’t rely on gut feelings or hot tips. They use a combination of technical indicators to make informed decisions. Here’s a breakdown of the most important indicators and how to actually use them.

Volume: The Most Underrated Indicator

Price gets all the attention, but volume tells the real story. Volume measures how many shares of a stock are traded during a given period, and it’s the single best confirmation tool available to traders.

When a stock breaks out to new highs on heavy volume, the move is more likely to sustain. When it breaks out on light volume, it’s often a false signal. Think of volume as conviction—it tells you how many market participants are backing a price move.

Key volume patterns to watch:

• Volume spikes: Sudden increases in volume often precede significant price moves.
• Declining volume on rallies: This suggests buying interest is fading and a reversal may be near.
• Increasing volume on pullbacks: Heavy selling pressure during a decline signals potential further downside.

Moving Averages: Finding the Trend

Moving averages smooth out price data to help identify the direction of a trend. The two most common types are:

• Simple Moving Average (SMA): Calculates the average closing price over a specified period. The 50-day and 200-day SMAs are the most widely followed.
• Exponential Moving Average (EMA): Gives more weight to recent prices, making it more responsive to new information. The 12-day and 26-day EMAs form the basis of the MACD indicator.

The “Golden Cross”—when the 50-day SMA crosses above the 200-day SMA—is one of the most well-known bullish signals. Its inverse, the “Death Cross,” signals bearish momentum.

Relative Strength Index (RSI)

RSI measures the speed and magnitude of recent price changes on a scale from 0 to 100. Traditional interpretation says:

• Above 70: The stock may be overbought (due for a pullback)
• Below 30: The stock may be oversold (due for a bounce)

However, experienced traders know that in strong trends, RSI can stay overbought or oversold for extended periods. A more effective approach is to look for RSI divergence—when the RSI makes a lower high while the price makes a higher high, it often signals weakening momentum and a potential reversal.

MACD: Momentum and Trend Combined

The Moving Average Convergence Divergence (MACD) is one of the most versatile indicators available. It consists of three components:

• MACD Line: The difference between the 12-period and 26-period EMA
• Signal Line: A 9-period EMA of the MACD line
• Histogram: The difference between the MACD line and signal line

When the MACD line crosses above the signal line, it generates a buy signal. When it crosses below, it generates a sell signal. The histogram helps visualize the strength of the trend—growing bars indicate strengthening momentum, while shrinking bars suggest the trend is losing steam.

Bollinger Bands: Volatility and Price Extremes

Bollinger Bands consist of a middle band (typically a 20-day SMA) with an upper and lower band set two standard deviations away. They expand when volatility increases and contract when volatility decreases.

Practical applications include:

• Squeeze plays: When the bands contract tightly, it often precedes a significant price move.
• Mean reversion: Prices touching the outer bands often revert toward the middle band.
• Trend identification: In strong uptrends, prices tend to “walk the band,” consistently touching or exceeding the upper band.

Putting It All Together

No single indicator is reliable on its own. Professional traders use multiple indicators in combination to confirm signals and reduce false positives. A good starting framework:

1. Use moving averages to identify the overall trend direction
2. Use RSI or MACD to time entries within that trend
3. Use volume to confirm the strength of any signal
4. Use Bollinger Bands to identify potential reversal points

The key is to develop a systematic approach rather than cherry-picking indicators that support your bias. This is exactly where algorithmic trading excels—it forces you to define your rules in advance and stick to them consistently.