Stock and Forex Technical Indicator System: From Basics to Practical Application

Why Technical Indicators Are the Key Factor

Every day, many traders jump into the market but lack a clear roadmap to determine entry and exit points or risk management strategies. The difference between reckless and cautious investors lies in their ability to read signals from stock technical indicators.

By mastering the use of indicators, you can:

• Accurately identify market trends
• Recognize important support and resistance levels
• Find optimal entry and exit points
• Manage risks more effectively

Technical indicators are a system of tools developed over decades by statisticians and traders, now automatically calculated on all trading platforms. They help you stay continuously updated on market developments.

The 4 Main Groups of Stock Technical Indicators

In the market, stock technical indicators are divided into 4 main types, each with its specific purpose:

( 1. Trend Indicators)

This group helps you determine the direction of price movement and the strength of that trend.

Moving Average ###MA( – Moving Average: This is the most basic tool for identifying long-term trends. MA does not precisely forecast future prices but indicates whether the current trend will continue or reverse soon. MA is calculated from closing prices over a specific period )e.g., 20 days, 50 days, 200 days(.

ADX )Directional Average( – Average Directional Index: This indicator helps determine whether the market is in a strong trend and how strong that trend is. Notably, ADX measures only the strength, not the direction )up or down(, so it can rise even when prices are falling. ADX helps you decide whether to participate in the market at this moment.

MACD )Moving Average Convergence Divergence( – Convergence Divergence of Moving Averages: MACD is built from two MAs with different periods, allowing you to observe changes in momentum, direction, and timing of price movements. When MACD crosses the signal line, it signals a change in trend direction and strength.

Ichimoku Kinko Hyo – Ichimoku Cloud: This is the most complex yet comprehensive indicator, created from 5 separate lines. Ichimoku not only identifies trend direction but also indicates support/resistance zones, buy/sell signals, and trend speed. Many professional traders use Ichimoku as the sole indicator for specific strategies.

Parabolic SAR – Stop and Reversal Indicator: SAR is designed to warn when a trend is about to change. It creates automatic exit points, helping you set reasonable stop-loss levels )stop loss(.

) 2. Momentum Indicators(

This group helps you determine the strength or weakness of the current price movement.

RSI )Relative Strength Index### – Relative Strength Index: RSI is presented as a number from 0 to 100, helping you identify overbought (overbought) or oversold (oversold) conditions relative to recent history. RSI above 70 indicates overbought, below 30 indicates oversold. RSI is often used with other indicators to confirm signals.

Stochastic Oscillator (SO) – Stochastic Oscillator: SO compares closing prices to the price range over a period, helping to identify overbought or oversold assets. Like RSI, SO ranges from 0-100, with SO > 80 indicating overbought and SO < 20 oversold. SO is especially useful for spotting divergence and reversal signals.

Williams %R – Williams Percent Range: This indicator is similar to Stochastic but with a reversal scale. It helps identify overbought/oversold levels and complements SO well.

( 3. Volatility Indicators)

These indicators measure market volatility, helping you adjust position sizes and set appropriate stop-loss levels.

ATR (Average True Range) – True Range Indicator: ATR measures absolute market volatility by calculating the average range of price movement per period. High ATR indicates strong volatility; low ATR suggests consolidation. ATR can be used to determine entry points and stop-loss levels.

Bollinger Bands ###BB( – Bollinger Bands: Bollinger Bands consist of 3 lines: the middle )SMA(, upper, and lower bands. When prices touch the upper band, it often indicates overbought conditions; when touching the lower band, oversold. Bollinger Bands are excellent when combined with MACD and RSI.

Standard Deviation )SD( – Standard Deviation: SD measures the deviation of prices from the moving average. When SD increases, it warns that the current trend may end soon, and the market may enter consolidation. SD is useful for identifying optimal entry points.

) 4. Volume Indicators(

These indicators help confirm the strength of a price move by analyzing trading volume.

MFI )Money Flow Index( – Money Flow Index: MFI combines price and volume to determine buying/selling pressure. It ranges from 0-100, with MFI > 80 indicating overbought and MFI < 20 oversold. MFI is often used with Elliott Wave and Fibonacci to confirm major trends.

A/D )Accumulation/Distribution### – Accumulation/Distribution Line: A/D identifies whether an asset is being accumulated (buying) or distributed (selling). If prices rise but A/D declines, it warns that buying volume is insufficient to support the price increase, possibly signaling an upcoming reversal.

OBV (On-Balance Volume) – On-Balance Volume: OBV helps identify buying or selling pressure by tracking volume. Rising OBV indicates active buying by traders. OBV is an excellent confirmation indicator for signals from other indicators.

Comparison Table and Classification of Stock Technical Indicators

*Bollinger Bands and Ichimoku Cloud are considered versatile indicators, usable independently or combined with other groups.

Important principle: Do not use multiple indicators from the same group. Instead, combine indicators from different groups to complement each other. Volume indicators should always be used together with other indicators to confirm trend strength.

BUY Trading Strategy Combining 4 Indicators

Knowing how each indicator works is one thing, but knowing how to combine them into an effective trading system is another. Here is a specific strategy using 4 indicators: RSI, Ichimoku, Bollinger Bands, and OBV.

( Step 1: Price must break and close above the middle Bollinger Band

The first and most important condition is to confirm that the price has successfully broken above the middle of the Bollinger Band. This signals momentum shifting from sellers to buyers. Only when this condition is met do you proceed to the next steps.

) Step 2: Wait for RSI to rise above 50 (if not yet)

After the price closes above the BB middle line, monitor RSI. If RSI is still below 50, it means momentum is still lagging behind the trend but is about to breakout (breakout is imminent). RSI above 50 indicates positive momentum.

Note: RSI does not always cross above 50 simultaneously with the price crossing the BB middle line. Sometimes, you need to wait a few candles for momentum to strengthen.

Step 3: Confirm buying strength from volume ###OBV rising(

Before placing a trade, confirm that trading volume is increasing, shown by OBV. Rising OBV indicates genuine buying pressure behind the price movement, not just a false signal.

After confirming all three conditions, you can confidently enter a buy order. But don’t forget the most crucial step: set a stop-loss to protect your capital.

) Step 4: Place Stop Loss below the lower Bollinger Band

The most reasonable stop-loss level is just below the lower Bollinger Band. Setting it too close may result in unexpected stop-outs during minor retracements. Setting it too far may lead to larger losses if wrong.

( Step 5: Take profit when a reversal signal appears

To effectively take profits, monitor a single indicator for exit signals, not all. Waiting for signals from all indicators may cause you to miss good profits.

The best exit signal is when the price breaks below the lower Bollinger Band, indicating a possible reversal. This is an ideal time to close the position and realize gains.

Conclusion: Technical Indicators Are the Foundation of Effective Trading

Stock technical indicators are an indispensable part of successful investing. Once you understand how to use each type and combine them, you gain a clear advantage in the market.

However, remember that no indicator is perfect. They can give false signals, especially during consolidation phases. That’s why combining multiple indicators from different groups is so important – it helps filter out false signals and act only when multiple confirmations align.

Practice, patience, and always remember: the market rewards those who know how to read it.