The Short Version
Technical analysts use mathematical indicators derived from price and volume to gauge momentum and potential turning points. These don't measure business value — they measure trading behavior.
Explain It Like I'm 10
Imagine you're watching how fast and how far a kid on a swing has been going for the last little while, not caring who the kid is or their grades — just their swinging motion. RSI is like asking 'have they been swinging really hard and fast lately, more than usual?' — if so, they might be due to slow down. MACD compares a recent 'average swing speed' to a longer-term 'average swing speed' to spot if momentum is shifting. Bollinger Bands are like a stretchy fence around the swing's normal range — when the kid swings so hard they hit the fence, that's an unusually big move worth noticing.
Step-by-Step Example
- 1 RSI is measured on a 0–100 scale based on recent price gains vs. losses.
- 2 If RSI reads 78, that's above the common 70 threshold — often labeled 'overbought,' meaning the price has climbed a lot recently and could be due for a pause or pullback.
- 3 MACD compares a 12-day price average to a 26-day price average.
- 4 When the shorter (12-day) average crosses above the longer (26-day) average, that's often read as a bullish momentum signal.
- 5 Bollinger Bands plot a band above and below a moving average, sized based on how much the price has been bouncing around (volatility).
- 6 If the price pokes outside the upper band, some traders view that as an overextended move, though it can also simply mean a strong trend is underway — no indicator is a guarantee.
Quick Recap
- ✓ RSI (Relative Strength Index): a 0–100 scale measuring recent price momentum; readings above 70 are often considered 'overbought', below 30 'oversold'.
- ✓ MACD (Moving Average Convergence Divergence): compares two moving averages to spot shifts in momentum and trend direction.
- ✓ Bollinger Bands: bands plotted above and below a moving average based on volatility; price touching the outer bands can signal an overextended move.