Beyond Price and Volume

While price and volume tell the primary story, technical indicators add quantitative precision. They turn subjective observations ("the stock looks overbought") into measurable signals. Used correctly, they help time entries and exits with more discipline than gut feel alone.

RSI (Relative Strength Index): Overbought/Oversold

RSI measures the speed and magnitude of recent price changes on a 0-100 scale. The standard period is 14 days. Traditional interpretations:

Above 70 — Overbought. The stock has risen too far, too fast. A pullback is likely (but not guaranteed — in strong trends, stocks can stay overbought for weeks).
Below 30 — Oversold. The stock has fallen excessively. A bounce is likely.
Divergence — If price makes a new high but RSI makes a lower high, momentum is weakening. This is one of the most powerful RSI signals.

RSI works best in range-bound markets. In strong trending markets, overbought/oversold signals can come too early.

MACD: Trend Following and Momentum

The Moving Average Convergence Divergence (MACD) combines two moving averages to generate signals:

MACD Line — The difference between the 12-period and 26-period exponential moving averages.
Signal Line — A 9-period EMA of the MACD line.
Histogram — The difference between the MACD line and signal line. Shows momentum strength.

Key signals:

MACD crosses above signal line — Bullish. Momentum is shifting upward.
MACD crosses below signal line — Bearish. Momentum is shifting downward.
MACD crosses above/below zero — The 12-period moving average crosses the 26-period. A crossover above zero confirms an uptrend; below zero confirms a downtrend.
Divergence — Price makes a new high, MACD doesn't. Momentum weakening. Often precedes reversals.

Bollinger Bands: Volatility Envelope

Bollinger Bands consist of a 20-period moving average with upper and lower bands set at 2 standard deviations above and below. They measure volatility:

Bands contract (squeeze) — Volatility is low. Low volatility is typically followed by high volatility. A squeeze signals a potentially large move coming — direction unknown.
Bands expand — Volatility is high. After expansion, volatility typically contracts.
Price touches lower band — Potentially oversold. Price tends to revert to the middle band (20-period MA).
Price walks the band — In a strong trend, price can "walk" the upper or lower band for extended periods. Don't blindly fade these moves.

How to Combine Indicators

The biggest mistake is stacking too many indicators. More isn't better — it's confusing. A clean setup:

Price + volume — Always. This is the primary data.
2 moving averages — 50-DMA and 200-DMA for trend direction.
1 momentum oscillator — RSI or MACD (not both — they're correlated). Use for entry/exit timing.
That's it. Three tools, maximum. If you need more, you probably don't understand the ones you have.

Key Takeaways

RSI identifies overbought/oversold conditions and momentum divergences.
MACD tracks trend direction and momentum with moving average crossovers.
Use at most 2-3 indicators. Price, volume, and one momentum oscillator is sufficient.