The 3 Most Important Trading Indicators Explained

When it comes down to trading indicators, there are A LOT! And it can get quite confusing at times. But do not worry, I got your back as I boiled it down to just 3.

I know what you’re thinking: “Didn’t he say in price action trading we do not use indicators?” And that’s almost right.

Trading Indicators in Price Action Trading

50 EMA 

What is an EMA? 

EMA stands for Exponential Moving Average.

The 50 EMA is a type of moving average where you take the average of the past 50 days’ closing prices and give more recent prices a higher weight.

It is a lagging indicator, which means it lags behind the price action. The 50 EMA is one of the most popular moving averages used by traders.

This moving average is used by day traders, swing traders, and long-term investors alike.

🚩 Moving averages only work if they have been “respected” in recent time. If that’s the case, then they can be used as: 

1. a form of support and resistance
   
2. a trend change if price brakes through it

The 50 EMA should never be used by its own but in combination with other signals as an additional confirmation.

RSI 

RSI, or relative strength index, is a technical indicator used in the analysis of financial markets.

It is a momentum oscillator that measures the speed and change of price movements.

The RSI is used to identify overbought and oversold conditions in the market, as well as to generate buy and sell signals.

The RSI is classified as a momentum indicator, as it is based on the premise that price movements tend to follow trends.

As such, the indicator is most useful when used in conjunction with other technical indicators.

The RSI is displayed as a line that fluctuates between 0 and 100. The indicator is considered overbought when the RSI line is above 70 and oversold when the RSI line is below 30.

RSI Divergence

The concept of RSI divergence is based on the notion that when price is rising but its RSI is falling, or vice versa, it signals that the trend is about to reverse. 

By analyzing divergences between the price action and its RSI, traders can attempt to anticipate trend reversals in the market.

When it comes to trading, RSI divergence is one of the more reliable signals that a trend reversal is about to take place. Traders use RSI divergence to make educated guesses as to when a price may reverse its current trend.

When the RSI begins to diverge from the price action on the chart, it is a sign that the trend is reaching its peak and is about to reverse. As the RSI diverges, the trend line on the chart will start to move in the opposite direction, signaling a possible reversal.

Traders should be aware that RSI divergence is not always an accurate indicator of a trend reversal. There may be other factors in play such as news announcements or economic data that can cause a security’s price to go in a different direction than the RSI suggests.

When trading with RSI divergence, it is important to look for other technical indicators that may be signalling a trend reversal. For example, if the RSI is diverging from the price action but the MACD is still trending in the same direction, then it may be a better idea to wait for the MACD to confirm the trend reversal.

RSI divergence is one of the most popular technical analysis tools used by traders today. By understanding how to identify divergences between the price action and the RSI, traders can better anticipate trend reversals and take advantage of potential trading opportunities.

Fibonacci

The Fibonacci sequence is one of the most famous sequences in mathematics. The sequence is named after Italian mathematician Fibonacci who first described it in the 13th century.

The Fibonacci sequence is formed by adding the previous two numbers in the sequence together. So, the sequence goes: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on.

The Fibonacci sequence has many applications in mathematics and other fields. For example, in nature, the Fibonacci sequence can be seen in the spiral patterns of shells and the arrangement of leaves on a plant.

In mathematics, the Fibonacci sequence can be used to calculate the Golden Ratio, which is a very important number in geometry and art.

In technical analysis, Fibonacci retracement levels are used to identify potential support and resistance levels.

Fibonacci retracement levels are created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. 

For example, if a stock price is trending higher and then pulls back, the 23.6% Fibonacci retracement level would be calculated by taking the high point and the low point of the pullback and dividing the vertical distance by 0.236.

The 38.2% Fibonacci retracement level would be calculated by taking the high point and the low point of the pullback and dividing the vertical distance by 0.382.