7 Technical Indicators To Build a Trading Tool Kit

Traders use technical indicators to gain a hold on the movement in the supply and demand of securities and market psychology. The best indicators are used to see when to buy or sell an asset.

Traders can choose from hundreds of technical indicators, from simple moving averages to complex oscillators. Each serves a specific purpose. Some measure momentum, others track volume patterns, while still others identify potential trend reversals. The key is selecting the right combination of indicators that complement each other and align with your trading style.

Below, we take you through seven key indicators that can form the basis of your tool kit as a technical trader.

Key Takeaways

• Technical indicators are used to analyze market conditions and help traders identify potential trades.
• Successful traders typically combine two to four complementary indicators rather than relying on a single signal.
• Volume-based indicators like on-balance volume (OBV) help confirm price movements by showing the strength of buying or selling pressure.
• Momentum indicators such as the relative strength index (RSI) and moving average convergence divergence (MACD) help identify overbought or oversold conditions.
• Different indicators serve different purposes—some predict future moves while others lag and confirm trends.

Tools of the Trade

Technical indicators transform raw market data like price and volume into clear visual signals traders can use to make decisions. They act as filters that help separate meaningful market moves from random noise.

These tools fall into four main categories:

• Price indicators (raw price charts, support and resistance lines)
• Trend indicators like moving averages
• Momentum indicators like RSI
• Volume indicators like OBV

Each category provides different insights into market behavior. For example, volume indicators show whether major institutional investors are participating in a price move, while momentum indicators reveal whether a trend is gaining or losing strength. Successful traders often combine indicators from different categories for a more complete market picture.

Day traders and technical analysts employ technical charting tools that generate signals to buy or sell or indicate trends or patterns in the market.

1. On-Balance Volume

• Type: Volume indicator
• Best uses: Trend confirmation and spotting divergences
• Trading time frames: All, but especially daily and weekly
• Complexity: Beginner-friendly

Traders use the OBV to measure the positive and negative flow of volume in a security over time. A rising OBV suggests intense buying pressure building up, while a falling OBV indicates increasing selling pressure. When OBV moves in the opposite direction of price (known as divergence), it often signals a potential reversal in the trend ahead.

For example, if a stock’s price makes new highs while OBV trends lower, this divergence suggests the rally may lack strong buyer support and could soon reverse. Conversely, if the price falls to new lows while OBV rises, it may indicate larger investors are buying up the asset before a potential upward move.

2. Accumulation/Distribution Line

• Type: Volume indicator
• Best uses: Identifying buying/selling pressure and divergences
• Trading time frames: Daily and intraday
• Complexity: Intermediate

The accumulation/distribution (A/D) indicator helps traders compare volume and price to assess whether a stock is being bought up or sold. This makes it particularly useful for detecting subtle shifts in buying and selling pressure that aren’t visible on the price chart alone.

Unlike OBV, which treats all volume as positive or negative, A/D assigns a multiplier to volume based on where the price closes within its range. If a stock finishes near its high, the indicator gives volume more weight than if it closes near the midpoint of its range. The different calculations mean that OBV will work better in some cases and A/D will work better in others.

If the indicator line trends up, it shows buying interest since the stock closes above the halfway point of the range. This helps confirm an uptrend. Meanwhile, if A/D falls, the price is finishing in the lower portion of its daily range; thus, volume is considered negative. This helps confirm a downtrend. 

Traders using the A/D line also watch for divergence. If the A/D starts falling while the price rises, this signals that the trend is in trouble and could reverse. Similarly, if the price trends lower and A/D starts rising, that could signal higher prices to come.

3. Average Directional Index

• Type: Trend strength indicator
• Best uses: Measuring trend strength and identifying range-bound conditions
• Trading time frames: Any time frame above 5-minute charts
• Complexity: Advanced

The average directional index (ADX) is a trend indicator used to measure the strength and momentum of a trend. This helps traders avoid one of the most common mistakes: trading trends without one. Unlike most indicators that tell you whether the price is moving up or down, ADX specifically measures the trend’s strength, regardless of direction.

The indicator consists of three lines: the ADX line (usually black) measures overall trend strength, while the positive directional indicator (DI+) and negative directional indicator (DI-) show trend direction. Readings above 40 indicate a strong trend, while readings below 20 suggest a weak or nonexistent one. Here’s how to put this together:

• ADX above 20 and DI+ above DI-. That’s an uptrend.
• ADX above 20 and DI- above DI+. That’s a downtrend.
• ADX below 20 is a weak trend or ranging period, often associated with the DI- and DI+ rapidly crisscrossing each other.

Many traders use ADX as a filter for other strategies—only taking trend-following trades when ADX is above 40 and switching to range-trading strategies when ADX is below 20. This systematic approach helps avoid forcing trades in unsuitable market conditions.

4. Aroon Indicator

• Type: Trend indicator
• Best uses: Identifying new trend beginnings and trend strength
• Trading time frames: Daily and weekly are often the most effective
• Complexity: Intermediate

The Aroon oscillator functions like a trend-spotting radar, helping traders identify when new trends are beginning and old ones are ending. Unlike many indicators that follow price movements, Aroon focuses on time, measuring how long it has been since the highest and lowest prices occurred within a given period.

The indicator consists of two lines: Aroon up and Aroon down. When Aroon up reaches high levels (above 70) while Aroon down stays low, this suggests a strong uptrend. The reverse signals a downtrend. What makes this indicator valuable is its ability to identify consolidation periods before new trends emerge. In addition, when the Aroon up crosses above the Aroon down, that signals a possible trend change. If the Aroon Up hits 100 and stays relatively close to that level while the Aroon down stays near zero, that confirms an uptrend. The reverse is also the case.

Many traders combine Aroon with volume indicators to confirm trend changes. When both Aroon and volume show strength in the same direction, it increases the likelihood that a trend will continue.

Important

Always make sure you practice with a trading demo account before you decide to use your own capital. This ensures that you understand how technical analysis (or any other strategy you use) can be applied to real-life trading.

5. MACD

• Type: Momentum and trend indicator
• Best uses: Trend identification and momentum measurement
• Trading time frames: All
• Complexity: Intermediate to advanced

The MACD helps traders assess a trend’s direction and momentum. It also provides trading signals. When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period.

The indicator comprises two lines: the MACD line and a signal line, which moves slower. When MACD crosses below the signal line, this indicates that the price is falling. When the MACD line crosses above the signal line, the price is rising. The histogram helps visualize the strength of these moves.

One of MACD’s most powerful features is its ability to show divergence from price, often signaling trend reversals before they occur in price. Traders value MACD for its versatility—it can be used to follow trends and help with strategies that rely on reversals.

6. Relative Strength Index (RSI)

• Type: Momentum oscillator
• Best uses: Identifying overbought/oversold conditions and trend strength
• Trading time frames: Any
• Complexity: Beginner to intermediate

The RSI moves between zero and 100, plotting recent price gains versus recent price losses. Thus, the RSI levels help gauge momentum and trend strength. 

The most basic use of an RSI is as an overbought and oversold indicator. When the RSI moves above 70, the asset is considered overbought and could decline.

When the RSI is below 30, the asset is oversold and could rally. However, assuming this too soon is risky. Thus, many traders wait for the indicator to rise above 70 and then drop back under it before selling or drop below 30 and then rise back that number above before buying.

When the indicator moves in a different direction than the price, the current price trend is weakening and could soon reverse.

Another use of the RSI is for support and resistance levels. During uptrends, a stock will often hold above 30 and frequently reach 70 or above. When a stock is in a downtrend, the RSI typically holds below 70 and frequently reaches 30 or below.

7. Stochastic Oscillator

• Type: Momentum oscillator
• Best uses: Identifying potential reversals and momentum shifts
• Trading time frames: Any time frame, but especially effective hourly and daily
• Complexity: Intermediate

The stochastic oscillator compares a security’s closing price to its price range over a specific period, helping traders identify potential turning points in the market. Like RSI, it oscillates between 0 and 100, but it tends to be more sensitive to price changes.

The stochastic oscillator has two lines: %K (the fast line) and %D (the slow line). The interaction between these lines creates trading signals, with crosses above 80 or below 20 being particularly significant. However, these signals become more reliable when used in light of the prevailing trend.

One key advantage of the stochastic oscillator is its ability to signal potential reversals even when price continues making new highs or lows. This early warning system helps traders prepare for possible trend changes before they become more obvious in the price action.

Is Technical Analysis Reliable?

Technical analysis attempts to gauge market sentiment using graph patterns and signals. The range of success for different indicators varies. Hence, it’s best to use a suite of technical tools and indicators with other techniques like fundamental analysis to improve reliability.

Which Technical Indicator Can Best Spot Overbought/Oversold Conditions?

The RSI is among the most popular technical indicators for identifying overbought or oversold stocks. The RSI is bound between 0 and 100. Traditionally, a reading above 70 indicates overbought, and below 30, oversold.

How Many Technical Analysis Tools Are There?

There are several dozen technical analysis tools, including a range of indicators and chart patterns. Market technicians are always creating new tools and refining old ones.

The Bottom Line

Technical indicators are essential tools in a trader’s arsenal, but their real power emerges when combined. While applying all seven indicators simultaneously might be tempting, successful traders typically focus on two or three that complement each other—perhaps combining a trend indicator like ADX with a momentum oscillator like RSI and a volume indicator like OBV. The key is understanding each indicator’s strengths and limitations rather than searching for a perfect all-in-one solution.

Technical indicators work best when aligned with your trading style and time horizon. They should confirm what price action suggests rather than substitute for sound trading principles and risk management. Start by mastering one or two indicators in a practice account before adding others to your strategy. Even the most sophisticated indicators cannot guarantee trading success, but they can help you make more informed trading decisions when used correctly.