Overview — Indicators as Decision Support

Indicators summarize price information to help with timing and risk control. Use them as confirmations alongside structure (support/resistance, trends, channels) rather than as standalone signals.

RSI (Relative Strength Index)

RSI oscillates between 0–100 to measure recent momentum. Default period is 14.

Key settings

• Period: 14 (common), 7–10 (faster), 20–21 (smoother).
• Levels: 30/70 (classic), 20/80 (trend markets), 40/60 (trend bias filter).

Signals

• Overbought/Oversold: Cross above 70 or below 30 suggests stretched momentum — look for reversal with price structure.
• Divergences: Price makes a new high/low but RSI doesn’t — potential reversal or consolidation.
• Range rules: In uptrends, RSI often holds 40–80; in downtrends, 20–60.

MACD (Moving Average Convergence Divergence)

MACD gauges the relationship between two EMAs (commonly 12 and 26) and a signal line (9 EMA). Components: MACD line, signal line, and histogram (difference).

Key settings

• Fast EMA: 12
• Slow EMA: 26
• Signal: 9

Signals

• Crossovers: MACD line crossing above/below signal can mark momentum shifts.
• Zero-line crosses: Above zero = bullish bias; below zero = bearish bias.
• Divergence: Price vs histogram/line divergence may precede reversals.

Bollinger Bands

Bollinger Bands use a moving average (typically 20 SMA) and standard deviations (±2σ) to frame volatility. Price often oscillates within bands; band width expands with volatility.

Key settings

• Period: 20 SMA
• Deviation: 2.0 (common), adjust to volatility.

Signals

• Mean reversion: Touch/close outside a band often reverts toward the middle band in ranges.
• Squeeze (BandWidth contraction): Narrow bands precede volatility expansions and breakouts.
• Walk the band: In strong trends, price can ride the outer band; avoid fading blindly.

Moving Averages (SMA/EMA)

Moving averages smooth price to reveal trend direction. EMAs weight recent data more heavily than SMAs.

Common sets

• Short-term: 9–10 EMA (momentum), 20 EMA (pullbacks).
• Medium: 50 SMA/EMA (trend filter).
• Long-term: 100/200 SMA (macro bias, dynamic S/R).

Signals

• MA slope: Upward/downward slope indicates trend direction.
• Crossovers: Golden/death cross concepts (e.g., 50/200). Better on higher timeframes.
• Dynamic S/R: Pullbacks to 20/50 MAs as continuation entries in trends.

Combining Indicators — Playbooks

Worked Examples — Numbers You Can Check

Example 1 — Pullback long with MA + RSI
Account: $10,000, risk 1% → $100
Setup: Price above 200 SMA, pullback to 20 EMA, RSI ≈ 45→50 rising
Stop: 30 pips below swing low
Pip value (1 lot) ≈ $10 → Risk per lot for 30 pips = 30×10 = $300
Position size = $100 / $300 = 0.33 lots → use 0.33 lots

Example 2 — BB Squeeze breakout
Condition: BandWidth at 6-month low; candle closes above upper band
Filter: MACD above zero; 50 SMA up
Entry: On close or retest of upper band
Risk: Initial stop under middle band or swing low; reduce size to 0.5× normal due to breakout risk

Pitfalls & Best Practices

• Avoid indicator overload — 2–3 tools with clear roles are enough.
• Tune parameters only slightly; over-optimization won’t generalize.
• Prioritize higher timeframe bias; ignore countertrend signals unless at major structure.
• Journal parameter choices and outcomes; iterate deliberately.

FAQ

Q: SMA or EMA?

A: EMAs react faster; SMAs are smoother. For pullbacks use 20 EMA; for bias use 50/200 SMA.

Q: Which RSI levels are best?

A: 30/70 is classic. In trends, use 40/60 bands; for stronger trends, 20/80 reduces false countertrend signals.

Q: Can I trade divergences alone?

A: Safer to combine with key levels or trend context; pure divergences can persist in strong trends.

Next Steps

Build templates for each playbook and test on a demo account. Track win rate, average R, and drawdowns. Keep risk ≤1–2% per trade and refine rules based on your journal.