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Indicators

Established

Calculations derived from price and volume. Around 60 are in common use; four families cover most of them.

Developed piecemeal through the 20th century. The standard open-source library implements 158 functions.

What it claims

Indicators needing many periods behave poorly on NEPSE shares that trade infrequently, and circuit limits cap the volatility measures. ​That arithmetic applied to price and volume can surface information the raw chart does not show plainly — the strength of a trend, the speed of a move, whether volume supports it.

How it works

  1. 1Trend indicators smooth price to show direction: moving averages, MACD, Parabolic SAR, ADX.
  2. 2Momentum indicators measure the speed of change and stretch: RSI, Stochastic, CCI, Williams %R, Rate of Change.
  3. 3Volatility indicators measure how far price typically travels: Average True Range, Bollinger Bands, Keltner channels.
  4. 4Volume indicators weigh price moves by the volume behind them: On-Balance Volume, Chaikin Money Flow, VWAP.
  5. 5Every indicator is derived from price, so none of them knows anything the price did not already contain.

The one thing to understand first

Every indicator on every platform is a calculation performed on price and volume. That is all the input there is. An indicator cannot know anything the price series did not already contain — it can only present it differently.

The standard open-source library implements 158 functions, of which around 119 are trading-relevant. You will use perhaps six. The rest are variations.

Four families, four questions

The four families

Trendwhich way?MA, MACD, ADXMomentumhow fast?RSI, StochasticVolatilityhow far?ATR, BollingerVolumehow real?OBV, VWAPall four are computed from the same price and volume
Almost every indicator answers one of four questions. Stacking several from the same family is one opinion repeated, not four opinions agreeing.

Rather than learning indicators one by one, learn what each family is for. Then pick at most one from each family that you actually have a question for.

FamilyQuestion it answersCommon examples
TrendWhich direction, and is there one at all?Moving averages, MACD, ADX, Parabolic SAR
MomentumHow fast, and is the move stretched?RSI, Stochastic, CCI, Williams %R, Rate of Change
VolatilityHow far does this normally travel?Average True Range, Bollinger Bands, Keltner channels
VolumeIs there real participation behind it?On-Balance Volume, Chaikin Money Flow, VWAP

Moving averages, and what lag really means

A moving average against price

pricemoving averagethe average lags by construction
The average smooths the noise and shows direction, but it is computed from prices that have already happened — so it always turns after price does.

A moving average is the average close over a set number of periods. It smooths noise so direction is visible. Because it is an average of past prices, it necessarily turns after price turns — this is not a flaw to be engineered away, it is what an average is.

  • Simple (SMA) weights every period equally.
  • Exponential (EMA) weights recent periods more, so it reacts sooner and whipsaws more.
  • The period matters more than the type. A 200-day and a 20-day average answer different questions.
  • Crossovers — the golden and death crosses — are popular because they are easy to see, not because they are especially reliable.

Every faster variant on the market — weighted, Hull, triple-exponential — is trading smoothness for responsiveness. There is no setting that gives both, and searching for one is a common way to waste months.

RSI, and the mistake almost everyone makes

RSI compares the size of recent gains to recent losses and scales the result between 0 and 100. Above 70 is conventionally called overbought, below 30 oversold.

The more useful reading is divergence — price makes a new high while RSI does not, suggesting the move is being made with less force than the last one. That is a genuine piece of information, though still not a signal on its own.

Choosing settings honestly

Default settings — 14 for RSI, 12/26/9 for MACD, 20 for Bollinger Bands — are conventions chosen decades ago, often for markets and timeframes unlike yours. They are not discoveries.

You can tune them, but be aware of what you are doing: with enough tuning, any indicator can be made to fit any past chart perfectly and predict nothing. If you change a setting, decide the reason first, and test the change on data you did not use to pick it.

How much weight it can carry

Indicators lag by construction — they are computed from prices that have already happened. Adding more of them does not add information, because they are all functions of the same few inputs; five momentum indicators agreeing is one opinion, not five. The useful ones answer a specific question you actually have: is this trending or ranging, is this move stretched, is volume behind it. Default settings are conventions, not discoveries.

Established. Widely documented and taught, but the primary texts are still in copyright, so we can point to them rather than host them.

On NEPSE specifically

Indicators needing many periods behave poorly on stocks that trade thinly or sit at circuit limits, because the price series has gaps and flat stretches that the arithmetic was not designed for.

The vocabulary

The 12 terms you need to follow any discussion of this method.

Moving averagealso: MA
The average closing price over a set number of periods, redrawn each period, used to smooth out noise and show trend.
MA = Sum of closing prices / Number of periods
Exponential moving averagealso: EMA
A moving average that weights recent prices more heavily, so it reacts faster than a simple one.
Relative strength indexalso: RSI
An oscillator between 0 and 100 measuring the speed of recent gains against recent losses. Conventionally above 70 is overbought and below 30 oversold.
RSI = 100 - (100 / (1 + Average gain / Average loss))
MACDalso: Moving Average Convergence Divergence
An indicator built from the difference between two exponential moving averages, with a signal line, used to spot momentum shifts.
MACD = 12-period EMA - 26-period EMA
Bollinger Bands
Bands drawn a set number of standard deviations above and below a moving average, showing how far price has stretched from its own average.
Average true rangealso: ATR
A measure of how much a stock typically moves in a period. Used to size positions and set stops to the stock's own volatility.
Stochastic oscillator
An indicator comparing the closing price with its high-low range over a period, to judge momentum.
Average directional indexalso: ADX
Measures how strong a trend is, without saying which way it points. Low readings mean a range, not a direction.
On-balance volumealso: OBV
A running total that adds volume on up days and subtracts it on down days, to see whether volume confirms price.
Volume weighted average pricealso: VWAP
The average price over a period weighted by volume — a benchmark for whether you traded well.
VWAP = Sum(Price x Volume) / Sum(Volume)
Parabolic SARalso: SAR
Plots dots that trail price and flip sides when the trend reverses, used to place trailing stops.
Divergence
When price and an indicator disagree — price makes a new high but the indicator does not — often read as a weakening trend.

All 180 terms in the glossary →

What the research says

12 paperson arXiv’s quantitative-finance archive that bear on this method. Preprints, so not all are peer-reviewed — read them as evidence to weigh, not as verdicts.

Metadata from arXiv, which places it in the public domain under CC0 1.0. The papers themselves remain at arXiv.