Popular indicators used in trading today: 5 essential tools for investors

In the current era, becoming a Trader has become an attractive profession for the new generation because it allows for 24-hour income generation, whether in stock markets, Forex, or cryptocurrencies. A true trader is essentially a speculator committed to profiting from price differences and market volatility. However, to succeed in trading, investors need a solid trading plan and popular indicators to help analyze trends and identify precise entry and exit points. This article will introduce you to 5 widely used indicators in trading, including their calculations and how to use them.

Comparison of the Top 5 Indicators

Before diving into each indicator in detail, let’s compare the main features of these five, considering their types, strengths, suitability, and cautions:

Moving Average (MA) is a trend indicator that makes it easy to observe price trends. It’s suitable for beginners and those running long-term trends. Its limitation is lagging because it’s calculated from past data.

RSI (Relative Strength Index), part of the Momentum indicators, is effective for short-term entry points and catching trend reversals. However, in strong trending markets, RSI can give false signals when overbought or oversold for extended periods.

MACD (Moving Average Convergence Divergence) is a hybrid indicator that shows both trend direction and strength. It provides a comprehensive market overview but signals tend to be slower than RSI.

Volume, a volatility indicator, confirms the reliability of price action and breakouts. Its limitation is that it cannot indicate price direction on its own.

Visible Range (Volume Profile) is a technique derived from Volume, used to identify the market’s average cost and strong support/resistance levels. Its downside is that the graph can look complex, and some platforms may charge extra.

Moving Average – The Path to Trend Observation

Moving Average (MA) is a moving average line that almost every trader uses to assess whether an asset’s price is trending upward or downward.

Using MA is straightforward: When the price is above the MA line, it indicates an uptrend; below the MA suggests a downtrend.

Types of Moving Averages include Simple Moving Average (SMA), Weighted Moving Average (WMA), and Exponential Moving Average (EMA). Most traders prefer EMA because it provides higher accuracy by giving more weight to recent prices.

Calculating MA depends on the number of candles chosen, e.g., MA 5 averages the last 5 days’ prices. Different periods include:

• Short-term: MA 5 (~1 week)
• Medium-term: MA 35 (~2 months)
• Long-term: MA 200 (~1 year)

When the short-term MA > medium-term MA > long-term MA, it confirms a strong uptrend; the opposite indicates a downtrend.

Advantages: Easy to interpret, visually clear, and can serve as dynamic support/resistance.

Limitations: MA is a lagging indicator, meaning signals come after the actual high or low points, and it can produce false signals in sideways markets.

RSI: A Tool for Entry and Exit Timing

Relative Strength Index (RSI) measures the buying and selling momentum of an asset, scaled from 0 to 100, indicating overbought or oversold conditions.

Standard RSI levels are 30 and 70:

• When RSI < 30 = oversold → buy signal
• When RSI > 70 = overbought → sell signal

Besides momentum, RSI can identify trend changes. If an uptrend is ending, RSI tends to move higher while prices remain high.

RSI calculation:
RSI = 100 - (100 / (1 + Average Gain / Average Loss))
where Average Gain and Average Loss are typically calculated over 14 periods, but can be adjusted.

Advantages: Precise for short-term entry points and divergence detection, which signals potential reversals.

Limitations: In strong trending markets, RSI can stay overbought or oversold for long periods, leading to false exits or entries.

MACD – A Comprehensive Trend and Momentum Tool

MACD consists of two lines: MACD line and Signal line, derived from exponential moving averages:

• MACD = EMA(12) – EMA(26)
• Signal Line = EMA(9) of MACD

Trading signals:

• When MACD crosses above the Signal line → bullish (buy)
• When MACD crosses below → bearish (sell)

Advantages: Combines trend and momentum analysis, providing a holistic market view.

Limitations: More complex calculation, and signals tend to lag behind price movements.

Volume – Indicator of Trading Activity

Volume indicates how much of an asset is traded, reflecting investor interest. High volume often confirms price movements:

• Price breakout with high volume suggests a genuine trend change.
• Price decline on high volume indicates strong selling pressure.
• Break of resistance with high volume confirms the breakout.

Price-Volume relationships:

• Rising price + rising volume = strong upward move
• Rising price + falling volume = weak move, caution advised
• Falling price + rising volume = strong downward move
• Falling price + falling volume = normal decline, wait for confirmation

Advantages: Validates price action; high volume breakouts are more reliable.

Limitations: Volume alone doesn’t indicate direction; in Forex, volume data is often broker-reported and not global.

Visible Range: The True Market Value Technique

Visible Range or Volume Profile is a popular indicator developed from Volume, designed to reveal where most trading activity occurs, helping identify strong support and resistance levels more accurately than traditional lines.

Usage:

• Price above the profile → uptrend (buy)
• Price below the profile → downtrend (sell)

Calculation: Based on the average price weighted by traded volume over a period, highlighting price levels with high trading activity.

Advantages: Shows the real cost basis of the market, enabling precise support/resistance zones.

Limitations: Can be complex for beginners; some platforms may require additional subscription.

Combining Indicators for Better Results

Remember: Indicators are tools, not foolproof solutions. Combining multiple indicators enhances signal clarity. Examples:

• MA + RSI: Trend direction + short-term entry points
• MACD + Volume: Trend + strength confirmation
• Volume Profile + Price Action: Strong support/resistance zones

Key: Always backtest strategies with historical data before live trading. No indicator guarantees success, as markets constantly evolve.

Summary: Choosing the Right Indicator for You

The 5 popular indicators (Moving Average, RSI, MACD, Volume, Visible Range) each have strengths and limitations. There’s no one-size-fits-all; your choice depends on your trading style, timeframe, and assets.

Successful trading development relies not just on using popular indicators but on:

1. Clear trading plans
2. Deep understanding of each indicator
3. Risk management (Stop Loss, Take Profit)
4. Discipline in following your strategy

Find the indicators and strategies that suit you best, and enjoy your trading journey.