Lesson 7 of 10 · 9 min
Indicators 101
Moving averages, RSI and MACD, what each one actually calculates, and how to use them without being fooled.
By the end you'll be able to
- Explain what a moving average, RSI and MACD each calculate
- Describe how changing the period changes an indicator's behaviour
- Use an indicator to confirm a chart read rather than replace it
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Every platform offers a hundred indicators. This lesson covers three, moving averages, RSI and MACD, and what each one does.
What an indicator is
An indicator is a calculation made from past prices and drawn on the chart. It cannot see the future; it summarises the past in a way that is sometimes easier to read than raw candles. That is useful, as long as you remember it is a summary.
The three that matter
Change the period. Short periods hug the price and react fast; long periods are smoother and slower.
A moving average is the average close over the last N periods. It smooths price so the trend is easier to see. The SMA weights every period equally; the EMA weights recent periods more, so it turns sooner. A rising average with price above it is a simple picture of an uptrend.
RSI scores recent gains against recent losses from 0 to 100. Above 70 is called overbought and below 30 oversold. In a strong trend RSI can sit above 70 for weeks while price keeps rising. It describes momentum, not a limit.
MACD is the gap between a fast and a slow EMA, drawn with its own average (the signal line) and a histogram of the difference. When the line crosses above the signal, momentum is turning up. It lags, because it is built from averages of averages.
Try it
Notice how a short period hugs the price and whipsaws, while a long period is smooth but late. There is no “best” setting, only a trade-off between speed and reliability.
How to use them
Read the chart first: trend, levels, candles. Then use an indicator to confirm. A buy at support in an uptrend is better if RSI is turning up from 35 than if it is at 75. An indicator that disagrees with the chart is a reason to wait, not a reason to overrule what price is doing.
Quick check
Question 1 of 3
What happens to a moving average when you increase its period?
Question 2 of 3
RSI has been above 70 for ten days in a strong uptrend. What does that mean?
Question 3 of 3
What is the best role for an indicator?
Go deeper: Moving averages in forex: SMA vs EMA and how to use them · RSI indicator explained · Bollinger Bands Explained: Volatility, Squeezes and Breakouts · MACD Indicator Explained: Signals, Settings and Mistakes