Technical Trading Tools 101

Technical indicators are not magical and they are not a Holy Grail. Market price action changes from trends to price ranges, and from low volatility to high volatility. They are good for building systems so you can measure your risk on each trade, and use them as trading tools to quantify your entries and exits. They are also helpful for identifying and trading trends.

Bollinger Bands are a technical trading tool that are best used in range-bound markets to measure support and resistance levels, when price gets extended from a medium term moving average like the 20 day SMA .

Relative Strength Index (RSI) is for finding good risk / reward ratios during overbought (70 RSI) or oversold (30 RSI) conditions. The RSI can work in both trends and range-bound markets, but it doesn’t work when a market price goes parabolic .

The Moving Average Convergence/Divergence (MACD) is a good tool for measuring swings in price up and down in markets with a wide price range.

Long term moving averages like the 200-day SMA are for trading long term trends.

Short term moving averages like the 5-day EMA and the  10-day EMA are for trading long term trends.

Average True Range (ATR) measures the trend of volatility of the price range.

When all is said and done, these are just trading tools; the profits come from how well we use them to build a price action trading system.