3 Key technical indicators

Among the wide range of technical indicators, some are significantly more popular among traders than others. Here are three of the most commonly used ones that you can try out in your demo account on Y4Trade.com:

1. Bollinger Bands

2. Relative Strength Index (RSI)

3. Stochastic Oscillator

Bollinger bands

Bollinger Bands are a technical indicator that extends the use of moving averages by adding two lines at a distance of two standard deviations from the market average. This tool helps traders visualize market volatility and determine whether a trend is likely to continue or reverse.

Bollinger Bands consist of three main lines:

• Middle line – the moving average of the given market

• Upper band – two standard deviations above the moving average

• Lower band – two standard deviations below the moving average

Standard deviation measures how far prices are from the average. Widely spaced bands indicate high volatility, while closely spaced bands signal a calmer market.

Like other technical indicators, Bollinger Bands can be adjusted to fit a trading style by modifying the length of the moving average or changing the number of standard deviations.

Trading with bollinger bands

There are multiple ways to interpret Bollinger Bands. The most common method involves observing how close the current market price is to one of the bands.

Bollinger Bands can be applied to trading charts in any time frame, making them useful for both day traders and long-term investors. They are particularly effective in trending markets when the price approaches or exceeds the opposite band, which may signal a potential trend reversal.

Relative strength index (RSI)

Another method for determining whether a market is overbought or oversold is by using the Relative Strength Index (RSI) indicator. Similar to MACD, RSI is displayed at the bottom of the chart as a line that moves above and below a scale.

RSI compares the average number of days an asset closes with a gain to the average number of days it closes with a loss. This calculation is then displayed on a scale from 1 to 100.

RSI is typically used with a period of 9, 14, or 25 calendar days (7, 10, or 20 trading days). The more days included in the calculation, the less volatile the resulting indicator value will be.

Trading with RSI

A typical way to interpret the Relative Strength Index (RSI) is that a value below 20 indicates the market is oversold, while a value above 80 signals that it is overbought.

Similar to Bollinger Bands, if a market in a strong uptrend reaches an RSI above 80, it may indicate an impending trend reversal. Likewise, if RSI drops below 20, it could suggest a potential end to a downward trend.

However, these signals are not guarantees of movement, so caution is necessary when using them.

Stochastic oscillator

The Stochastic Oscillator functions similarly to RSI but with one key difference. Instead of averaging the number of up and down days, it compares an asset's closing price to its average price over a given period.

Like other indicators, the Stochastic Oscillator is used to identify overbought and oversold markets, helping traders find suitable entry and exit points.

How the stochastic oscillator works

The Stochastic Oscillator consists of two main lines displayed in a sub-chart:

• %K Line – Compares today’s closing price to the trading range over the past 14 days.

• %D Line – Serves as a signal line. It is a five-day simple moving average (SMA) of the %K line.

Calculation of the % K line:

1. Subtract the lowest market price over the past 14 days (excluding today) from today’s closing price.

2. Multiply the result by 100.

3. Divide this value by the price range over the past 14 days (highest price – lowest price).

This method generates a value within the range of 0 to 100, which is then used to identify potential trading signals.

As with most technical indicators, it is not necessary to use the exact 14-day Stochastic. You can adjust the number of periods tracked according to your trading style and preferences.

Trading with the stochastic oscillator

The Stochastic Oscillator is similar to RSI in that values above 80 indicate an overbought market, while values below 20 suggest an oversold market. Additionally, it can be used to identify crossovers, similar to MACD.

Many traders combine both approaches—waiting for a crossover between the oscillator lines when the indicator is already in extreme zones. For example, if the %K line crosses above 80 and then drops below the %D line, it can be a strong sell signal.