Technical Indicator Guide: 15 Important Indicators to Capture Effective Trading Signals

Many new traders starting their careers often encounter a common problem: not knowing when to enter a buy order, when to sell, or how to adjust their trading strategy to suit market conditions. The key answer lies in technical indicator (indicator) — analytical tools created by statisticians and experienced traders over decades of development.

Today, these indicators are calculated automatically and provided free of charge on most trading platforms. If you master how to use these indicators, you will have the ability to identify price trends, support and resistance levels, as well as more accurate trading signals. This article will help you understand the 15 most popular indicators in Forex and stock markets.

Four Main Groups of Technical Indicators

In technical analysis, traders use three basic tools: trend, price charts, and technical indicators. Indicators are divided into four main groups, each serving a specific purpose:

• Trend indicators — help determine the direction of the price
• Momentum indicators — assess the strength of price movements
• Volatility indicators — measure the degree of price fluctuations
• Volume indicators — analyze buying and selling pressure through trading volume

Trend Indicators: Determining Market Direction

Moving Average (Moving Average - MA)

This is the most basic indicator that helps traders recognize upcoming trends. The MA line shows the average price over a certain period, calculated from closing prices. The main purpose of MA is not to forecast precisely but to show how a trend forms and sustains. When the price is above the MA line, the trend is usually upward, and vice versa.

ADX Indicator (Directional Average)

This index helps traders determine whether the current market is in a strong trend or not, regardless of whether the price is rising or falling. ADX can rise even when prices are falling because it only measures trend strength, not its direction. Through ADX, traders can decide whether to enter the market or wait.

Ichimoku Kinko Hyo (Ichimoku Cloud)

This indicator consists of 5 lines (Tenkan-sen, Kijun-sen, Senkou span A, Senkou span B, Chikou span), forming a “cloud” on the chart. Ichimoku is very useful for identifying support and resistance zones, as well as helping traders determine whether the market is trending or oscillating within a price range.

MACD (Moving Average Convergence Divergence)

MACD is formed from the convergence and divergence of two moving averages. This indicator is excellent for observing changes in momentum, direction, and timing of price actions. When MACD begins to change, it signals that the current trend may be about to pause or reverse.

Parabolic SAR

This indicator provides clear trading signals on when to enter, exit, and where to place stop-loss orders. Parabolic SAR is usually displayed as dots on the chart, positioned above or below the price depending on the trend direction.

Momentum Indicators: Assessing the Strength of Movements

RSI (Relative Strength Index)

RSI is one of the most important indicators for determining the strength or weakness of an asset. It ranges from 0 to 100, helping traders identify whether an asset is overbought (overbought) or oversold (oversold). RSI is often used in conjunction with other indicators to generate stronger trading signals.

Stochastic Oscillator (SO)

This indicator compares the closing price to the high-low range (high-low) over a period, helping traders detect when an asset is overbought or oversold. SO ranges from 0 to 100, with readings above 80 indicating overbought conditions, and below 20 indicating oversold.

Williams % R (%R)

This indicator works similarly to the Stochastic but with a reversed scale. Williams %R helps traders identify potential overbought or oversold conditions, providing reliable trading signals.

Volatility Indicators: Measuring Price Instability

ATR (Average True Range)

ATR is a simple yet effective indicator used to measure market volatility. It does not indicate the direction of the price but shows how much the price is fluctuating. Traders often use ATR to determine entry and exit points based on current volatility levels.

Bollinger Bands (Bollinger Band - BB)

Bollinger Bands consist of three lines: a middle (Simple Moving Average) and two bands above and below. When the price approaches the upper band, it indicates an overbought market; approaching the lower band suggests oversold conditions. Bollinger Bands are often combined with MACD and RSI to generate stronger trading signals.

Standard Deviation (Standard Deviation - SD)

SD measures the deviation of the price from the moving average. The higher the SD, the more volatile the market. A sudden increase in SD can warn that the current phase is ending and the market may enter consolidation or reversal.

Volume Indicators: Analyzing Buying and Selling Pressure

Money Flow Index (MFI)

MFI combines price and volume data to provide information on whether an asset is overbought or oversold. MFI ranges from 0 to 100, with high MFI (gần 100) indicating strong selling pressure, and low MFI (gần 0) indicating strong buying. MFI is often used with Elliott Wave and Fibonacci analysis.

Accumulation/Distribution (Accumulation/Distribution - A/D)

A/D helps traders determine whether an asset is being accumulated or distributed by investors. Based on volume and price levels, the A/D line shows upward/downward trends and divergence signals. When prices rise but A/D declines, it may indicate insufficient buying volume to support the price increase, suggesting a possible reversal.

On-Balance Volume (OBV)

OBV is used to identify buying and selling pressure based on trading volume and price. The simple principle: if today’s price increases, today’s OBV = previous OBV + today’s volume. When OBV rises, it indicates investors are actively buying the asset.

Summary Table of Technical Indicators

To use them effectively, you should combine indicators from different groups rather than many from the same group. The table below summarizes indicators by type:

Note: Bollinger Bands and Ichimoku are considered versatile indicators that can operate independently in specific strategies. Volume indicators are often used to confirm trend strength.

Combining Multiple Indicators: Practical Example

To enhance trading effectiveness, you need to combine 3-4 indicators from different groups to generate reliable trading signals. Here is an example of a buy strategy combining RSI, Ichimoku, Bollinger Bands, and OBV:

Step 1: Confirm Price Breakout of Bollinger Band

First, wait until the price breaks above and closes above the middle line of the Bollinger Band. This is the initial signal indicating a forming uptrend.

Step 2: Check RSI to Confirm Momentum

Next, observe the RSI. If RSI remains below 50 (indicating weak momentum), wait until RSI rises above 50. Usually, momentum follows the trend slightly, so you may need to wait for confirmation that momentum is increasing along with the price.

Step 3: Wait for Volume Increase (OBV Rising)

The next crucial step is to wait until trading volume begins to increase, confirmed by rising OBV. This indicates genuine buying pressure behind the price movement. When all three conditions are met, it’s time to enter a buy order.

Step 4: Place Stop Loss Below the Lower Bollinger Band

To protect your capital, set a stop-loss order below the lower Bollinger Band. If placed too close, you might get stopped out by normal fluctuations; if too far, your losses could be large. The lower Bollinger Band is a reasonable point for stop-loss placement.

Step 5: Take Profit When Price Breaks Below the Lower Bollinger Band

To take profit, you should not wait for all other indicators. Instead, close the trade when you see a clear exit signal, such as the price breaking below the lower Bollinger Band or Ichimoku signaling a reversal. Crossovers of Ichimoku lines or the price crossing below the MA line are also good exit signals.

If you are trading a short (short) position, just reverse the steps above.

Conclusion: Indicator Knowledge as a Foundation for Success

Technical indicators are indispensable tools for any trader aiming to trade systematically and safely. Once you master how to use these indicators, you will have an advantage in the market and be able to manage risks more effectively. However, it’s important to remember that no indicator is perfect. Indicators can give false signals, especially in highly volatile markets.

That’s why combining indicators from different groups is the optimal strategy. This way, you can confirm trading signals and minimize the risk of being misled by false signals. But most importantly, continuous practice is essential — only through time and trading experience can you become proficient and use indicators most effectively.