What is Technical Analysis in a Nutshell?

Technical Analysis and Key Indicators

Technical analysis is a method used to help determine the direction of future price movements based on past price movements. To achieve accurate evaluation in this analysis method, certain indicators must be closely monitored. 

The most commonly used indicators in technical analysis include the exponential moving average, MACD, RSI, Stochastic, and Stochastic RSI.

Moving averages crossing each other or being above or below certain levels can be interpreted as buy or sell signals in technical analysis. While RSI and Stochastic determine overbought and oversold zones, MACD explains the direction of the price movement trend.

When a stock price is above its 9-, 21-, 50-, and 200-day exponential moving averages, it indicates that the stock is in an upward movement and hasn't given a sell signal. Similarly, a MACD above zero can be interpreted as a continuation of an upward movement.

The RSI indicator being below 70 and the Stochastic RSI being below 70 ensure the stock price is not yet in the overbought zone. This serves as a precaution against potential selling that could be triggered after overbought conditions. In the Stochastic indicator, the 80-100 range shows the overbought zone, while the 0-20 range shows the oversold zone. A stock being below the 80 value is an important indicator that it's not in the overbought zone.

To recap, each indicator serves a different purpose:

• Moving averages help identify buy or sell signals based on crossovers and whether prices are above or below key levels.

• RSI and Stochastic highlight overbought and oversold zones.

• MACD clarifies whether a price trend is gaining or losing momentum.

For example, if a stock trades above its 9-, 21-, 50-, and 200-day EMAs, it suggests a strong upward trend with no immediate sell signal. Similarly, when the MACD is above zero, it signals continued bullish momentum.

Meanwhile, an RSI below 70 and a Stoch RSI below 70 indicate the stock is not yet in overbought territory, helping traders avoid premature entries right before potential corrections. In the Stochastic Oscillator, the 80–100 range marks overbought conditions, while 0–20 marks oversold conditions. A value below 80 is a reassuring sign that a stock is not yet overheated.

What is an Exponential Moving Average?

The EMA is a type of moving average that gives greater weight to recent price data, making it more responsive to current market conditions than a simple moving average (SMA).

It's a moving average calculated by taking the average of price movements of a financial product within a specified period, giving more weight to recent price movements. Due to this weighting, the exponential moving average is considered a less lagged version of the moving average.

If the exponential moving average (EMA) exhibits an increasingly rising trend and the instrument's price is close to the EMA trendline, this is typically interpreted as a buy signal. On the other hand, if the EMA has a falling trend and the instrument's price has risen above the EMA, this is typically evaluated as a sell signal.

• Rising EMA with price close to the line → often a buy signal, showing prices are respecting upward momentum.

• Falling EMA with price above the line → often a sell signal, suggesting upward moves may not be sustainable.

Because of its responsiveness, the EMA is often considered a “less lagging” version of a moving average.

What is MACD (Moving Average Convergence/Divergence)?

MACD in technical analysis shows the relationship between short-term and long-term price trends. It's created by taking the difference between the short-term (12-day) exponential average and the long-term 26-day exponential average.

The zero level is the indicator's equilibrium point. MACD moves above and below the zero level. When the 12-day average value is higher than the 26-day average value, MACD is above the zero level. When MACD is above zero, short-term demand is stronger than long-term demand, indicating a bull market. When the 12-day moving average value is lower than the 26-day moving average value, MACD is below the zero level, indicating a bear market.

Key takeaways:

• It is calculated as the difference between the 12-day EMA and the 26-day EMA.

• The zero line acts as the equilibrium point.

  • Above zero: the short-term trend (12-day) is stronger than the long-term trend (26-day), signaling bullish momentum.

  • Below zero: the short-term trend is weaker, pointing to bearish conditions.

In simple terms: MACD above zero suggests buyers dominate; MACD below zero suggests sellers dominate.

What is RSI (Relative Strength Index)?

The Relative Strength Index (RSI) is a technical analysis indicator used to analyze the price movements of financial instruments.

RSI interpretation is used to evaluate the speed and magnitude of price movements in financial instruments. RSI produces a value between 0 and 100 and is interpreted in a specific manner.RSI value of 70 or higher: Indicates the financial instrument may be in overbought conditions. A high RSI indicates that prices are trending upward, and the probability of a correction or pullback has increased.
RSI value of 30 or lower: Indicates the financial instrument may be in oversold conditions. A low RSI indicates that prices are trending downward, and an upward movement may be forthcoming.

RSI Recap:

The RSI measures the speed and magnitude of recent price changes, producing a value between 0 and 100.

• RSI ≥ 70: Potentially overbought → price may be due for a correction.

• RSI ≤ 30: Potentially oversold → price may be due for a rebound.

RSI doesn’t predict direction on its own but is powerful when combined with trend analysis. A high RSI in an uptrend often signals strength, but also caution for possible pullbacks.

What is STO (Stochastic Oscillator)?

The Stochastic Oscillator compares a security’s closing price to its price range over a set period, showing momentum and potential reversals.

The Stochastic indicator doesn't follow volume and price. This indicator measures price momentum, or the speed at which prices change. As a basic technical analysis rule, momentum changes direction faster than price.

Bull or bear market reversals, as indicated by the Stochastic indicator, can be detected more easily. Besides trend reversals, this indicator is also used to detect overbought or oversold levels.

When measuring the Stochastic value, two values are found:%K = 100 x (Close – Low 5) / (High 5 – Low 5)
%D = 3-day simple moving average of %K

The 80-100 range is the overbought zone, while 0-20 is the oversold zone. When the %K curve crosses the %D curve downward, it gives a sell signal; when it crosses upward, it gives a buy signal.

Key takeaways:

• STO produces two values:

  • %K = 100 × (Close – Lowest Low) / (Highest High – Lowest Low)

  • %D = 3-day SMA of %K

• Overbought zone: 80–100

• Oversold zone: 0–20

Signals:

• %K crossing above %D → potential buy signal

• %K crossing below %D → potential sell signal

Because momentum often shifts before price itself, the Stochastic Oscillator can highlight turning points early.

What is STO RSI (Stochastic RSI Indicator)?

The Stochastic RSI indicator (Stoch RSI) is actually an indicator of an indicator. It's used in technical analysis to perform a stochastic calculation on the RSI indicator.

RSI is one step away from price, so a stochastic calculation of RSI is two steps away. This is important because, like any indicator that is more than one step away from price, Stoch RSI's short-term connections to actual price movement can be cut.

Overbought and oversold conditions are traditionally different from RSI. While RSI overbought and oversold conditions are traditionally set at 70 for overbought and 30 for oversold, Stoch RSI typically indicates 80 for the overbought zone and 20 for the oversold zone.

• RSI already steps one level away from price, and Stoch RSI takes it a step further.

• This makes Stoch RSI highly sensitive, often more so than RSI alone.

Interpretation of STO RSI:

• Overbought zone: Above 80

• Oversold zone: Below 20

• Compared to RSI, Stoch RSI provides faster signals, but with the trade-off of being more volatile.

Conclusion

In practice, traders often combine these indicators: for example, confirming an uptrend with EMAs, then checking MACD and RSI for momentum and entry timing, and finally refining with Stochastic/ Stoch RSI for precision.