Chapter 9 of 9
Indicator workshop: SMA, EMA, MACD, RSI and volatility bands
Calculate common indicators correctly and understand why several indicators can repeat the same price information.
In this chapter
Smoothing introduces choices and lag #
An n-period SMA is the arithmetic mean of the last n observations. A common EMA uses alpha = 2/(n+1), with a declared initialisation. Different seeds and price inputs can produce different early values.
A crossover describes a relationship between smoothed histories. It does not prove that a trend will continue. State the completed-bar timing and evaluate sideways-market whipsaws as well as trend periods.
Keep the MACD sign convention explicit #
A common default MACD is 12-period EMA minus 26-period EMA; the signal line is commonly a 9-period EMA of MACD. The histogram is MACD minus signal. Other implementations must be labelled.
Reversing the subtraction reverses the sign. Always check the platform definition rather than copying a formula blindly. A signal-line cross and a zero-line cross are different events, neither a universal instruction to trade.
RSI measures a defined momentum calculation #
A common RSI uses smoothed average gains and losses over 14 periods: RSI = 100−100/(1+RS), where RS is average gain divided by average loss under the smoothing convention. Edge cases with zero losses or flat prices need an implementation rule.
Levels such as 70 and 30 are conventions, not guaranteed reversal barriers. In a strong trend, RSI can stay elevated or depressed. Divergence is a pattern to define and test, not proof that price must turn.
Bands and ATR describe variation, not certainty #
A common Bollinger-style band uses a moving average plus/minus a chosen multiple of rolling standard deviation. That construction does not guarantee a stated probability of containment for market returns. ATR measures true range under a chosen lookback and smoothing.
Use volatility measures to describe regime or size a separately specified rule. Five indicators derived from the same closes are not five independent confirmations. Freeze parameters and costs before measuring the result.
Hypothetical worked example
A fictional MACD and RSI check
If EMA12 is 105 and EMA26 is 100, conventional MACD is +5. With signal line +4, histogram is +1. Reversing the EMAs would produce a different signed measure.
For a simplified RSI input with smoothed average gain 2 and average loss 1, RS is 2 and RSI is about 66.67. That number does not itself establish a buy, sell or probability.
Common mistakes
- Reversing MACD’s sign without relabelling it.
- Treating RSI 70 as an automatic reversal.
- Interpreting volatility bands as a guaranteed probability envelope.
With EMA12 = 105 and EMA26 = 100, what is conventional MACD?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Desk assignment
What to submit
Calculate one indicator by hand, match its platform settings and compare a frozen rule with an unfiltered baseline after costs.
Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.
Sources and further reading
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- CME Group: technical analysis of commodity prices ↗
- Bailey et al.: The Probability of Backtest Overfitting ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.