# Best indicators for trading: what each one measures

> Moving averages, RSI, MACD, Bollinger Bands, volume and momentum explained in plain words, with what the research says and classic rules that use them.

Written by [Tactfolio research team](https://tactfolio.com/about/editorial-policy.md), published 2026-10-16, updated 2026-10-16, data as of 2026-09-25.

There is no single best indicator for trading. Widely used technical indicators include moving averages, the RSI, MACD, Bollinger Bands, volume and rate of change. Each one measures a different thing about price, and the research on whether they help is mixed.

## Key points

- A **technical indicator** is a number worked out from past prices or trading volume. It tries to sum up what the market has been doing.
- Most indicators measure one of four things: trend, momentum, swings in price, or trading activity.
- Indicators look backward. None of them can see what comes next.
- Studies of simple trading rules found some gains in old data. Later tests found many of those gains faded.
- A fair way to judge an indicator is to test a full rule built on it, with costs, over many years.

## What are the best indicators for trading?

The best indicator is the one that fits the question your rule asks. Here are six widely used technical indicators, what each one measures, and a classic Tactfolio strategy that uses the same idea where one exists.

| Indicator | What it measures | A classic that uses it |
| --- | --- | --- |
| Moving average | Trend: the average price over a set number of days | [200-day moving average](https://tactfolio.com/strategies/200-day-moving-average.md), [golden cross](https://tactfolio.com/strategies/golden-cross.md), [Faber 10-month moving average](https://tactfolio.com/strategies/faber-10-month-moving-average.md) |
| RSI (relative strength index) | How strong recent gains are next to recent losses, on a 0 to 100 scale | None among our classics |
| MACD | The gap between a fast and a slow moving average | None among our classics |
| Bollinger Bands | How far price sits from its average, measured in recent swings | None among our classics |
| Volume | How many shares traded | None among our classics |
| Rate of change (momentum) | How much the price rose or fell over a set time | [Dual momentum](https://tactfolio.com/strategies/dual-momentum.md), [Vigilant Asset Allocation](https://tactfolio.com/strategies/vigilant-asset-allocation.md) |

A seventh idea, volatility, is not a classic chart indicator. But one classic is built on it, the [volatility-managed portfolio](https://tactfolio.com/strategies/volatility-managed-portfolio.md). **Volatility** is how much prices swing up and down.

## Moving averages: the trend indicator

A **moving average** is the average closing price over the last set number of days. Each day the newest price comes in and the oldest drops out. A price above its moving average is the most common sign of an uptrend.

Many classic rules use it. The 200-day moving average strategy holds the S&P 500 while it closes above its 200-day average and Treasury bills below it. As of September 25, 2026, its hypothetical backtest from mid-2007 returned about 8% a year. The S&P 500 returned about 11%. But the rule's worst fall was about 22%, against 55% for the S&P 500.

Our guide to the [moving average](https://tactfolio.com/learn/moving-average.md) shows how to work one out by hand, and how the golden cross works.

## RSI: the speed of recent moves

The **RSI** (relative strength index) compares the size of recent up days with recent down days. It runs from 0 to 100. J. Welles Wilder Jr. introduced it in his 1978 book [New Concepts in Technical Trading Systems](https://openlibrary.org/isbn/0894590278), using 14 days.

Traders often call a reading above 70 "overbought" and below 30 "oversold". But a strong stock can stay above 70 for weeks. Our [RSI indicator](https://tactfolio.com/learn/rsi-indicator.md) guide walks through the formula with round numbers. A close cousin, the [stochastic oscillator](https://tactfolio.com/learn/stochastic-oscillator.md), compares today's close with the recent high and low instead.

## MACD: two moving averages at once

**MACD** (moving average convergence divergence) is the gap between a faster and a slower moving average. Gerald Appel says he invented it in the late 1970s, in his book [Technical Analysis: Power Tools for Active Investors](https://www.informit.com/store/technical-analysis-power-tools-for-active-investors-9780131479029).

Most charts use a 12-day and a 26-day average. A 9-day average of the MACD line, called the signal line, is drawn on top. When the MACD line crosses above the signal line, traders read it as rising momentum. MACD carries much the same information as a moving average crossover.

## Bollinger Bands: price against its usual swings

**Bollinger Bands** are a 20-day moving average with a band above it and a band below. John Bollinger sets the bands two standard deviations away, as he explains on [his own site](https://www.bollingerbands.com/bollinger-bands). A **standard deviation** is a measure of how far prices usually stray from their average.

The bands widen when prices swing more and narrow when they calm down. Bollinger says the bands show whether a price is high or low compared with its recent past. That is a relative idea. It is not a buy or sell order.

## Volume: how much trading happened

**Volume** is the number of shares that changed hands in a day. Traders use it to judge how much weight to give a price move. A breakout on heavy volume gets more attention than one on light volume.

Volume is often read next to another indicator, not alone. Tactfolio's builder does not read volume today. Its indicators cover price, returns and volatility.

## Rate of change: momentum

**Rate of change** is the percent a price rose or fell over a set time, such as 12 months. Investors call this **momentum**. Rules built on it hold what has been rising and step away from what has been falling.

There is real research behind this one. Tobias Moskowitz, Yao Hua Ooi and Lasse Pedersen studied 58 futures markets in their 2012 paper [Time Series Momentum](https://doi.org/10.1016/j.jfineco.2011.11.003). They found that a market's past 1 to 12 months of returns tended to carry forward, then partly reversed over longer spans. Our [momentum stocks](https://tactfolio.com/learn/momentum-stocks.md) guide explains the idea for single stocks.

Two classics use it, dual momentum and Vigilant Asset Allocation. Dual momentum picks US stocks, foreign stocks or bonds each month by 12-month return. As of September 25, 2026, its hypothetical backtest from August 2008 returned less than the S&P 500 with a smaller worst fall. It still lost about a third in early 2020.

## Volatility: how much prices swing

The volatility-managed portfolio holds less stock after jumpy months and more after calm ones. As of September 25, 2026, its hypothetical backtest from mid-2007 returned about 7.5% a year, against about 11% for the S&P 500. Its worst fall was about 17%, against 55%.

## Do technical indicators actually work?

The evidence is mixed. Some simple rules looked useful in old data, and many did not hold up later.

- William Brock, Josef Lakonishok and Blake LeBaron tested moving average rules on the Dow Jones index from 1897 to 1986. Their [1992 paper](https://doi.org/10.1111/j.1540-6261.1992.tb04681.x) in the Journal of Finance found support for the rules.
- Ryan Sullivan, Allan Timmermann and Halbert White tested the same kinds of rules again, with checks for luck. The best rule up to 1986 did not keep working from 1987 to 1996, [their 1999 paper](https://doi.org/10.1111/0022-1082.00163) found.
- Cheol-Ho Park and Scott Irwin reviewed 95 modern studies in [2007](https://doi.org/10.1111/j.1467-6419.2007.00519.x). 56 found gains, 20 found losses and 19 were mixed. They warned that many studies had testing flaws.

The pattern is a warning. If you try enough rules on the same data, a few will look great by luck. That is called **data snooping**. Our page on [why past results mislead](https://tactfolio.com/docs/concepts/why-past-results-mislead.md) explains how it happens.

## How to pick indicators for your own rules

Start with the question, then pick the indicator that answers it.

1. **Is the market going up?** Use a moving average or a 12-month return.
2. **Which asset is strongest?** Rank by rate of change.
3. **How rough is the ride?** Use volatility.
4. **When do I get out?** Decide the exit before you enter. Our [stop-loss](https://tactfolio.com/learn/stop-loss.md) guide compares stop orders with rules-based exits.

Avoid stacking indicators that measure the same thing. MACD crosses zero when its two moving averages cross, so it mostly agrees with a crossover rule. Some investors also rank whole sectors by momentum. That is called [sector rotation](https://tactfolio.com/learn/sector-rotation.md).

## Common mistakes

- **Trusting one chart.** An indicator that "called" one top looks smart in hindsight. Test the full rule over many years.
- **Buying a signal you cannot check.** Some paid services sell indicator alerts with no full record. Read our guide to [trading signals](https://tactfolio.com/learn/trading-signals.md) first.
- **Ignoring costs.** Fast indicators trade often. Each trade costs a little.
- **Tuning until it fits.** Changing a 200-day average to 187 days because it tested better is fitting noise.
- **Forgetting the slow stretches.** Even rules that worked over decades had years of lagging. [Trend following](https://tactfolio.com/learn/trend-following.md) is a good example.

## Try it on Tactfolio

You can turn an indicator into a full rule and see its whole backtest before you trust it. The [strategy builder](https://tactfolio.com/builder) reads moving averages, exponential moving averages, RSI, returns over any lookback and volatility. For example, hold a fund while it trades above its 200-day average and hold Treasury bills otherwise. The backtest shows every year, including the bad ones. Strategies on US stocks and ETFs run on daily prices and hold long positions only.

## Common questions

### What is the most accurate trading indicator?

No indicator is accurate in the sense of predicting the next move. Each one describes the past in a different way. A better question is whether a full rule built on it held up over many years and different markets, after costs.

### What are the best indicators for day trading?

The same indicators show up on day trading charts, set to minutes instead of days. Short time frames mean more trades, and costs add up faster. Tactfolio tests stock and ETF rules on daily prices, so we do not test day trading rules.

### Is RSI or MACD better?

They answer different questions. RSI compares the size of recent gains and losses. MACD tracks the gap between two moving averages, so it behaves more like a trend tool. Neither has strong evidence on its own.

### How many indicators should I use?

Usually one or two is enough. Two indicators that measure the same thing add little. Many classic strategies use one trend or momentum reading and one defensive asset, like Treasury bills, to fall back on.

### Do moving averages work?

Moving average rules are among the most studied, and the results are mixed. Classic rules on the S&P 500 cut the worst falls in backtests but usually returned less than holding the index in strong markets.

## The details

- **Simple moving average (n days):** sum of the last n closes, divided by n.
- **RSI (Wilder, 14 days):** RS = average gain ÷ average loss over 14 days. RSI = 100 − 100 ÷ (1 + RS).
- **MACD:** 12-day exponential moving average minus 26-day exponential moving average. Signal line: 9-day exponential moving average of MACD.
- **Bollinger Bands:** middle band is the 20-day simple moving average. Upper and lower bands are 2 standard deviations of price above and below it.
- **Rate of change (n):** (today's close ÷ close n days ago) − 1.
- Tactfolio backtests use daily closes with dividends reinvested and a 0.05% cost per trade. The figures above were measured on prices through September 25, 2026. They are hypothetical.

## Put it into practice

- [Trend following bot](https://tactfolio.com/bots/trend-following-bot.md): A trend following bot that holds SPY above its 10-month moving average and Treasury bills below.
- [Backtesting](https://tactfolio.com/backtesting.md): Free backtesting software for stocks, ETFs, and crypto perps.
- [Paper trading](https://tactfolio.com/paper-trading.md): Paper trade a whole strategy with pretend money at real prices.

## Sources

- [New Concepts in Technical Trading Systems](https://openlibrary.org/isbn/0894590278), J. Welles Wilder Jr., Trend Research, 1978 (Open Library record), accessed 2026-10-16
- [Technical Analysis: Power Tools for Active Investors](https://www.informit.com/store/technical-analysis-power-tools-for-active-investors-9780131479029), Gerald Appel, FT Press, 2005, accessed 2026-10-16
- [Bollinger Bands](https://www.bollingerbands.com/bollinger-bands), John Bollinger, accessed 2026-10-16
- [Simple Technical Trading Rules and the Stochastic Properties of Stock Returns](https://doi.org/10.1111/j.1540-6261.1992.tb04681.x), Brock, Lakonishok and LeBaron, Journal of Finance, 1992, accessed 2026-10-16
- [Data-Snooping, Technical Trading Rule Performance, and the Bootstrap](https://doi.org/10.1111/0022-1082.00163), Sullivan, Timmermann and White, Journal of Finance, 1999, accessed 2026-10-16
- [What Do We Know About the Profitability of Technical Analysis?](https://doi.org/10.1111/j.1467-6419.2007.00519.x), Park and Irwin, Journal of Economic Surveys, 2007, accessed 2026-10-16
- [Time Series Momentum](https://doi.org/10.1016/j.jfineco.2011.11.003), Moskowitz, Ooi and Pedersen, Journal of Financial Economics, 2012, accessed 2026-10-16
- [Builder reference](https://tactfolio.com/docs/builder), Tactfolio docs, accessed 2026-10-16