Module 7: Technical Indicators

Indicators are mathematical calculations based on price, volume, or open interest data. They lag behind price action but can provide useful confirmation signals.[^18][^19]

Moving Averages

Moving averages smooth out price data to identify trend direction.

Simple Moving Average (SMA): The arithmetic mean of closing prices over a specified period. A 50-period SMA adds up the last 50 closing prices and divides by 50.

Exponential Moving Average (EMA): Gives more weight to recent prices, making it more responsive to current price action than the SMA.

Key moving averages for day trading:

9 EMA: Very short-term, used for scalping entries and momentum.[^18]
20 EMA: Short-term trend direction.
50 SMA/EMA: Intermediate trend gauge.
200 SMA: Long-term trend—widely watched by institutions.

How to use: Price above the moving average = bullish bias. Price below = bearish bias. When a shorter MA crosses above a longer MA, it's a "golden cross" (bullish). When it crosses below, it's a "death cross" (bearish).

VWAP (Volume Weighted Average Price)

VWAP calculates the average price a security has traded at throughout the day, weighted by volume. It resets each session.[^18]

Price above VWAP = short-term bullish sentiment.
Price below VWAP = short-term bearish sentiment.
VWAP acts as dynamic intraday support/resistance.
When used with the 9 EMA, a breakout above both VWAP and the 9 EMA signals strong momentum—a potential entry.[^18]

RSI (Relative Strength Index)

RSI is a momentum oscillator measuring speed and magnitude of price changes on a scale of 0-100.[^20][^18]

Above 70 = overbought (price may be due for a pullback).
Below 30 = oversold (price may be due for a bounce).
RSI Divergence: When price makes a new high but RSI makes a lower high, it signals weakening momentum (bearish divergence). When price makes a new low but RSI makes a higher low, it signals strengthening momentum (bullish divergence).[^16]

MACD (Moving Average Convergence Divergence)

MACD is a trend-following momentum indicator showing the relationship between two moving averages (typically 12-period and 26-period EMAs).[^20][^18]

MACD Line: 12 EMA minus 26 EMA.
Signal Line: 9-period EMA of the MACD line.
Histogram: Difference between MACD line and signal line.
Bullish signal: MACD crosses above the signal line, histogram turns green.
Bearish signal: MACD crosses below the signal line, histogram turns red.[^18]

Using Indicators in Pairs

Indicators are most effective when used in combination rather than isolation:[^18]

Indicator Pair	Purpose	How They Work Together
RSI + MACD	Trend reversals	RSI signals potential reversal early; MACD confirms when the reversal is happening[^18]
VWAP + 9 EMA	Breakout confirmation	VWAP shows intraday bias; 9 EMA confirms breakout strength and provides entry[^18]
50 SMA + 200 SMA	Major trend direction	Golden/Death crosses for swing bias

Important Warning About Indicators