Section 2 · Module 2.2
Technical Indicators
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Moving Averages (SMA / EMA)
What it does: Smooths out price data to form a single, flowing trend line. SMA weights all periods equally; EMA weights recent prices more and reacts faster.
Why it is used: The 50-day and 200-day SMAs are universally watched support and resistance zones. Price above a rising MA confirms an uptrend filter for swing traders.
Moving averages — price vs SMA 50 / SMA 200
Price holding above rising SMAs = uptrend filter; 50/200 zones act as watched S/R.
RSI (Relative Strength Index)
What it does: Measures the speed and change of price movements on a 0–100 scale.
Why it is used: Identifies overbought or oversold conditions and trend divergences.
- Above 70: Overbought — trend strong but extended.
- Below 30: Oversold — bounce possible.
- Swing filter: In uptrends, pullbacks to RSI 40–50 often offer entries.
RSI (14) — 0–100 momentum oscillator
Above 70 = overbought stretch; below 30 = oversold — also watch divergences vs price.
MACD (Moving Average Convergence Divergence)
What it does: Tracks the relationship between two moving averages of a stock's price (MACD line, signal line, and histogram).
Why it is used: Generates clear buy and sell momentum triggers via line crossovers.
MACD — line, signal & histogram
MACD crossing above signal = bullish momentum trigger; cross below = bearish.
Bollinger Bands
What it does: Places standard deviation bands above and below a central moving average (typically 20-period SMA ± 2σ).
Why it is used: Measures market volatility and identifies when prices are overextended. A tight squeeze often precedes an explosive breakout.
Bollinger Bands — SMA ± 2σ
Narrow squeeze (middle stretch) often precedes a volatility expansion / breakout.
Fibonacci Retracement
What it does: Draws horizontal lines at mathematical percentages (38.2%, 61.8%, and others) of a prior swing move.
Why it is used: Estimates the depth of a stock's pullback before it may resume a trend — educational zones, not guarantees.
Fibonacci retracement — pullback depth levels
After a impulse move, 38.2% / 61.8% zones are common pullback magnets before trend resumes.
Average True Range (ATR)
What it does: Measures the average volatility and trading range of a stock over a set time.
Why it is used: Crucial for calculating stop-loss placement based on market noise rather than a fixed rupee distance.
ATR — volatility-based stop distance
Wider ATR → wider stop; sizes risk to market noise instead of a fixed rupee gap.
Accumulation / Distribution Line (A/D)
What it does: Gauges supply and demand by looking at where price closes relative to its daily range, multiplied by volume.
Why it is used: Helps confirm whether buying or selling pressure is building quietly beneath the price tape.
Accumulation / Distribution — price vs A/D
Rising A/D while price stalls or dips can hint at quiet institutional buying (and vice versa).
Knowledge check
20-period Bollinger Bands contract to their tightest width in six months. What does this predict?
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