Essential Technical Indicators: Moving Averages, RSI, MACD, and Bollinger Bands

Specific Investor Scenario

You’ve identified a Support level for a stock. But every time you buy, the price breaks through the level and hits your Stop-Loss. Is there a way to “confirm” if a bounce is real or if a trend is about to change? Can math help you see what price action alone might miss?

Quick Answer

Yes, by using Technical Indicators. Think of them as the dashboard of a car—they tell you the speed (momentum), the engine health (trend), and whether you’re about to run out of fuel (oversold/overbought).

Official Fact: According to the NSE Academy, indicators are best used as “confirmatory tools” rather than primary signal generators. The price itself remains the most important piece of data.

The CORE Four Indicators

1. Moving Averages (MA)

• Type: Lagging (Trend Follower).
• The Calculation: The average price of a stock over a set period (e.g., 50 days or 200 days).
• The Signal: If the price is above the 200-day MA, the Long-term trend is considered Bullish.

2. Relative Strength Index (RSI)

• Type: Leading (Oscillator).
• The Calculation: Measures the speed and change of price movements on a scale of 0 to 100.
• The Signal: RSI above 70 = “Overbought” (Prepare for a drop); RSI below 30 = “Oversold” (Prepare for a bounce).

3. MACD (Moving Average Convergence Divergence)

• Type: Trend-Following Momentum.
• The Calculation: Shows the relationship between two moving averages of a security’s price.
• The Signal: When the MACD line crosses above the Signal line, it’s a “Bullish Crossover.”

4. Bollinger Bands

• Type: Volatility Indicator.
• The Calculation: A middle line (MA) and two outer bands that expand and contract based on market volatility.
• The Signal: When the price touches the Lower Band, it is often a good buy zone for Mean Reversion traders.

Comparative Breakdown

Indicator	Primary Use	Best Market Condition
Moving Averages	Trend Direction	Trending Markets
RSI	Overbought/Oversold	Sideways / Flat Markets
MACD	Momentum Shift	Breaking Out
Bollinger Bands	Volatility / Support	Ranging / Consolidating

Practical Implication for Investors

• Avoid Indicator Overload: Don’t use 10 different indicators on one chart. Most indicators use the same price data, so they will often tell you the same thing (Collinearity).
• The ‘2-Signal’ Rule: Only enter a trade if at least two different tools agree. For example: Price is at Support + RSI is Oversold.
• Divergence: If the Stock Price makes a “Higher High” but the RSI makes a “Lower High,” it’s a major warning that the trend is weakening (Bearish Divergence).

Action Items for Investors

1. Apply the 200-EMA: Add the 200-period Exponential Moving Average to your Nifty chart. Notice how often the market respects this line.
2. Setup RSI Alerts: Many broker apps allow you to set an alert for when the RSI of a stock hits 30 or 70. Use these for Swing Trading entries.
3. Check Historical Performance: Go back 6 months on a stock like Reliance. Count how many times a “MACD Crossover” correctly predicted a move.

Verification Link

Dictionary of Technical Analysis at NSE: nseindia.com/education/knowledge-center

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