Stock Technical Analysis - 5 Key Indicators

What is Technical Analysis?

Instead of looking at company profits, technical analysis looks at price patterns and tries to predict where the price will go next. It uses charts, lines, and math formulas to spot trends. Think of it like reading the mood of the market using past price data.

A. SMA (Simple Moving Average)

Explanation

The average price of a stock over the last N days. It smooths out the day-to-day ups and downs so you can see the overall direction.

Formula

SMA = (P1 + P2 + P3 + ... + Pn) / n

Let's put in real numbers:

Example: Take 5 days of closing prices: ₹100, ₹102, ₹98, ₹105, ₹103

5-day SMA = (100 + 102 + 98 + 105 + 103) / 5
= 508 / 5
= ₹101.6

Simple Moving Average chart showing price line and SMA line

What it tells you

Price above SMA = stock is in an uptrend (bullish).
Price below SMA = stock is in a downtrend (bearish).

B. EMA (Exponential Moving Average)

Explanation

Like SMA but gives more weight to recent prices. This means it reacts faster when prices change suddenly.

Formula

EMA_today = Price_today × k + EMA_yesterday × (1 - k)
where k = 2 / (N + 1)

Let's put in real numbers:

Example: With N = 5 days, k = 2/(5+1) = 0.333

Yesterday's EMA was ₹101, today's price is ₹107.

EMA = 107 × 0.333 + 101 × 0.667
= 35.6 + 67.4
= ₹103

Notice: The EMA (103) jumped closer to today's price (107) than a simple average would.

EMA vs SMA comparison chart showing EMA reacts faster

What it tells you

EMA reacts faster than SMA. It is good for spotting trend changes early.
When the price crosses above the EMA, it could mean the start of an uptrend.

C. RSI (Relative Strength Index)

Explanation

Tells you if a stock is overbought (too expensive, everyone already bought it) or oversold (too cheap, everyone already sold it). It gives a score from 0 to 100.

Formula

RSI = 100 - (100 / (1 + RS))
where RS = Average Gain / Average Loss (over 14 days)

Let's put in real numbers:

Example: Over the last 14 days:
Average gain per day = ₹3, Average loss per day = ₹2

RS = 3 / 2 = 1.5
RSI = 100 - (100 / (1 + 1.5))
= 100 - (100 / 2.5)
= 100 - 40
= 60

RSI of 60 means the stock is neither overbought nor oversold - it is in neutral territory.

RSI indicator chart with overbought and oversold zones

What it tells you

RSI > 70 = Stock might be too expensive. It could fall soon (overbought).
RSI < 30 = Stock might be too cheap. It could rise soon (oversold).
RSI around 50 = Neutral, no strong signal.

D. Bollinger Bands

Explanation

A band (like a channel) drawn around the price that shows if the stock is moving too much or too little. When price goes outside the band, something unusual is happening.

Formula

Middle Band = 20-day SMA
Upper Band = SMA + 2 × Standard Deviation
Lower Band = SMA - 2 × Standard Deviation

Let's put in real numbers:

Example: If the 20-day SMA = ₹500 and the standard deviation = ₹20:

Upper Band = 500 + (2 × 20) = ₹540
Middle Band = ₹500
Lower Band = 500 - (2 × 20) = ₹460

So the price should normally stay between ₹460 and ₹540. If it breaks out, pay attention!

Bollinger Bands chart with upper, middle and lower bands

What it tells you

Price near upper band = Stock might be overbought, could fall.
Price near lower band = Stock might be oversold, could rise.
Bands getting narrow = A big price move is coming soon (called a "squeeze").

E. MACD (Moving Average Convergence Divergence)

Explanation

Shows whether a trend is getting stronger or weaker. It compares two moving averages and tells you when momentum is shifting.

Formula

MACD Line = 12-day EMA - 26-day EMA
Signal Line = 9-day EMA of the MACD Line
Histogram = MACD Line - Signal Line

Let's put in real numbers:

Example:
12-day EMA = ₹520, 26-day EMA = ₹510

MACD Line = 520 - 510 = 10
Signal Line (from previous calculations) = 7
Histogram = 10 - 7 = 3 (positive = bullish)

Since MACD (10) is above Signal (7), momentum is positive - the uptrend is getting stronger.

MACD chart with signal line crossovers and histogram

What it tells you

MACD crosses above Signal = Buy signal (bullish crossover).
MACD crosses below Signal = Sell signal (bearish crossover).
Histogram growing = Trend getting stronger. Histogram shrinking = Trend weakening.

Quick Reference Table

Indicator	What It Shows	Buy Signal	Sell Signal
SMA	Average price trend	Price crosses above SMA	Price crosses below SMA
EMA	Fast-reacting trend	Price crosses above EMA	Price crosses below EMA
RSI	Overbought/Oversold	RSI rises above 30 (from below)	RSI drops below 70 (from above)
Bollinger Bands	Price volatility range	Price bounces off lower band	Price touches upper band
MACD	Trend strength & direction	MACD crosses above Signal	MACD crosses below Signal

Disclaimer: Technical indicators are tools, not guarantees. They can give wrong signals, especially in sideways markets. Always do your own research, consider multiple indicators together, and never invest money you cannot afford to lose.