Starting from practical experience: Analyzing the four most practical indicators in stock technical analysis

Why Do Investors Need to Master Technical Indicators?

In stock investing, the core challenge investors face is: how to accurately time entry and exit points? Fundamental analysis tells you whether a stock is worth buying, but technical analysis reveals the best timing to buy for maximum profit.

Technical indicators are the solution to this problem. They analyze historical price data through calculations and present market patterns in the form of lines or curves, helping investors identify trends, discover turning points, and assess market heat. Compared to candlestick pattern analysis, technical indicators have the advantages of low entry barriers and easy-to-understand interpretation, allowing beginners to quickly get started.

Four Commonly Used Indicators Explained: From Basic to Advanced

First Line of Defense: Moving Averages (Moving Average)

The Moving Average (MA) is the most frequently used technical indicator in the market and also the easiest to understand.

Calculation method:

N-day Moving Average = Sum of closing prices over N days ÷ N

For example, the 5-day MA = sum of closing prices over the past 5 days ÷ 5; the 60-day MA = sum over 60 days ÷ 60.

Practical application is straightforward:

When the stock price stays above the moving average line, it indicates a bullish trend, with buyers in control; conversely, if the price remains below the average line for a long time, it suggests a bearish market with sellers dominating.

Investors can choose the appropriate moving average combinations based on their trading cycle. Short-term traders tend to use 5-day and 10-day MA with 5-minute and 15-minute K-lines; medium to long-term investors prefer 20-day and 60-day MA with daily or weekly K-lines. By observing crossovers of different period MAs, investors can capture key points of market trend reversals.

Second Line of Defense: Relative Strength Index (RSI)

RSI is another user-friendly indicator that is presented as a single blue curve, making it intuitive and easy to read.

Calculation formula:

RSI = (Average of gains over N days) / (Average of gains + average of losses) × 100

The indicator ranges between 0-100.

Clear interpretation standards:

• RSI > 70: Overbought zone, market overheated, potential for a pullback
• RSI < 30: Oversold zone, strong selling pressure, rebound opportunities emerging

Besides analyzing the value itself, investors can also observe two RSI lines of different periods to catch crossover signals. When the short-term RSI (green line) breaks above the long-term RSI (red line), it’s called a golden cross, indicating potential strong upward movement and a buy signal; conversely, when the short-term RSI drops below the long-term RSI, forming a death cross, it suggests downward risk and potential for shorting.

( Third Line of Defense: MACD (Moving Average Convergence Divergence)

MACD is a classic indicator in technical analysis, especially suitable for medium-term trend judgment.

Unlike simple moving averages, MACD is based on the Exponential Moving Average (EMA), which gives more weight to recent prices, making it more sensitive to price fluctuations.

Core components:

• DIF (fast line) = Short-term EMA - Long-term EMA
• MACD (slow line) = EMA of DIF
• Histogram = DIF line - MACD line

Practical signals:

When DIF (fast line) crosses upward through MACD (slow line), and the histogram shifts from negative to positive, it’s a golden cross, indicating rising bullish momentum and a buy signal; when DIF crosses downward through MACD, and the histogram shifts from positive to negative, it’s a death cross, signaling bearish dominance and a potential sell or short opportunity. Observing the histogram helps assess the strength of market momentum.

) Fourth Line of Defense: Stochastic Indicator (KD Indicator)

The KD indicator consists of K (fast line) and D (slow line), mainly used to predict market high and low points.

Calculation steps:

First, calculate RSV (Fast Stochastic):

RSV = (Today’s closing price - N-day lowest low) / (N-day highest high - N-day lowest low) × 100%

Then, smooth K and D:

• K = (RSV + previous K × (N-1)) / N
• D = (K + previous D × (N-1)) / N

Typically, N is 9 or 14 days, but actual settings should be adjusted based on personal trading cycles.

Interpretation logic:

The KD values also range from 0-100. When both KD values are above 80, the market is overbought, with a high probability of continued rise; when both are below 20, the market is oversold, and a downtrend may be imminent.

The most important application is cross analysis: in oversold zones (KD < 20), when K crosses above D, it forms a golden cross, signaling a good buy point; in overbought zones (KD > 80), when K crosses below D, it indicates a good shorting opportunity.

Additional Indicators: Expand Your Analysis Toolbox

Besides the four core indicators, investors can supplement with the following to build a more comprehensive analysis system.

Trend Indicators

Bollinger Bands consist of three green solid lines that move with market K-line fluctuations. Investors can estimate future market trends by observing the range and oscillation of these lines, identifying support and resistance levels.

Other Oscillator Indicators

Williams Percent Range (Williams %R) is similar to KD, fluctuating between 0-100. It observes the highest and lowest points over a period to determine if the price is overbought or oversold, helping find suitable trading opportunities.

Commodity Channel Index (CCI) is somewhat unique, with no strict range limits. CCI moves with price increases and decreases. In practice, observing divergence between CCI and price can indicate trend reversals. When prices continue rising but CCI fails to rise accordingly, it suggests waning buying interest and a possible end to the uptrend; the opposite applies for downtrends.

Average True Range (ATR) measures market volatility. Rising ATR indicates increasing volatility, often used to set stop-loss points; decreasing ATR suggests waning volatility. Since ATR does not align directly with trend direction, it should be used in conjunction with other indicators.

( Volume Indicators

Volume (Volumes) show current trading activity, helping assess market engagement. Rising volume indicates increased participation and activity; declining volume suggests cooling market interest.

Practical Guide to Using Technical Indicators

) How to Choose the Right Indicators for You?

There’s no absolute right or wrong in selecting indicators; the key is matching them with your trading style.

( The Wisdom of Combining Indicators

Using a single indicator inevitably involves lagging issues, especially in highly volatile markets, where parameter relevance diminishes. Therefore, the best approach is multi-indicator combination.

For example, use moving averages to determine the overall trend (bullish or bearish), then confirm overbought or oversold conditions with RSI or KD, and finally rely on MACD cross signals for precise entry and exit points. This combination significantly improves interpretative accuracy and reduces the risk of indicator failure.

At the same time, investors should not overly rely on technical indicators. Fundamental analysis and market news are equally important. Truly valuable investment targets are supported by fundamentals and driven by market sentiment. Technical indicators are auxiliary tools that help investors enter the market at the right time.

Summary

Technical indicators, with their simple and intuitive nature, have become powerful tools for market analysis. Moving Averages, RSI, MACD, and KD are the four most commonly used tools. Mastering their principles and applications enables investors to handle most market situations.

However, remember that technical indicators are ultimately based on historical data and can be lagging. The smartest approach is to combine technical analysis with fundamental analysis, while also observing market sentiment and institutional movements. Only then can you build a complete investment decision system and improve your long-term success rate.