Top 5 Financial Indicators Every Investor Should Track with AI Tools
We are living a world where there is an abundant number of financial indicators usable in investing. But the point is, given limited time and arbitrage opportunities, which ones is the most valuable, helping us pinpoint the right asset.
In today’s blog, I will try to delve into this topic and try to show the most valuable financial indicators, why they are valuable and how to use them. Of course, it is possible to distinguish these metrics as those valuable for short-term or long-term analysis. For short-term analysis, generally, obtained from daily or intraday price movement whereas long-term analysis are extracted from financial statements like balance sheet, income statement, and cash flow.
In this blog, I will focus on five financial indicators that provide signal for short term analysis:
Relative Strength Index (RSI)
Moving Average Convergence Divergence (MACD)
Bollinger Bands
Moving Averages (Simple & Exponential)
Volume
Relative Strength Index (RSI)
The Relative Strength Index is a popular momentum oscillator used in technical analysis that measures the speed and magnitude of recent price changes. RSI helps traders determine if a stock or asset is overbought (potentially overvalued and due for a pullback) or oversold (potentially undervalued and due for a bounce).
Why is RSI Important?
Overbought/Oversold Detection: RSI helps identify potential reversal points in the market by highlighting overextended moves.
Momentum Confirmation: Confirms the strength of trends and momentum behind price moves.
Divergence Signals: Divergence between RSI and price can warn of trend reversals before they happen.
Widely Used: Trusted by traders and analysts worldwide; often used as a core part of algorithmic and AI trading strategies.
RSI Formula
The standard RSI calculation uses 14 periods (can be days, hours, minutes):
RSI=100−(100 /1+ RS)
where:
RS = Average Gain over n periodsAverage Loss over n periods/ Average Loss over n periodsAverage Gain over n periods
Step-by-step:
Calculate the average gain and average loss over the past 14 periods.
Compute the Relative Strength (RS).
Plug RS into the formula to get the RSI value (ranging from 0 to 100).
How to Use RSI in Trading
Key Levels:
Above 70: Asset is considered overbought (potential for a downward correction).
Below 30: Asset is considered oversold (potential for a rebound).
Midline (50): Can act as a support/resistance for momentum direction.
Divergence: If the price makes a new high/low that isn’t matched by the RSI, this can signal a trend reversal.
Typical Use Cases:
Buy Signal: RSI crosses above 30 (from oversold region)
Sell Signal: RSI crosses below 70 (from overbought region)
Trend Confirmation: RSI staying above 50 in uptrends, below 50 in downtrends.
Insights and Practical Tips
Avoid using RSI alone: combine it with trend analysis, moving averages, or volume for better signals.
AI tools like Stockaivisor can monitor RSI for thousands of stocks simultaneously and spot patterns (like RSI divergence) that are easy to miss.
RSI works best in ranging (sideways) markets. In strong trends, the RSI can remain overbought or oversold for extended periods.
Adjust the period (e.g., use RSI (7) for shorter-term signals or RSI(21) for longer trends) depending on your trading style.
Example: If Apple’s RSI drops below 30, it may be due for a rebound—especially if AI detects positive sentiment or a volume spike. Conversely, if the RSI stays above 70 and price momentum fades, it could be a sign to take profits.
MACD (Moving Average Convergence Divergence)
It is a powerful momentum indicator used in technical analysis. It shows the relationship between two moving averages of a security’s price. MACD is widely used to identify potential buy and sell signals, trend direction, and momentum shifts.
Why is MACD Important?
Trend Identification: Helps traders and investors spot bullish or bearish trends.
Signal Generation: Pinpoints potential entry and exit points with crossovers.
Momentum Measurement: Gauges the strength of price moves.
Versatile: Works across multiple timeframes and asset classes, from stocks to crypto.
MACD Formula
There are three main components:
MACD Line: Difference between the 12-period EMA and the 26-period EMA.
Signal Line: 9-period EMA of the MACD line.
Histogram: The difference between the MACD line and the Signal line.
MACD Line=EMA12−EMA26
Signal Line=EMA9 of MACD Line
Histogram=MACD Line−Signal Line
where 12, 26, 9 are the most common settings, but they can be adjusted.
How to Use MACD in Trading
MACD Crossover:
Bullish Signal: MACD Line crosses above the Signal Line (potential buy).
Bearish Signal: MACD Line crosses below the Signal Line (potential sell).
Zero Line Cross:
Above Zero: Indicates an upward momentum (bullish).
Below Zero: Indicates a downward momentum (bearish).
Histogram Analysis: Expanding histogram bars signal strengthening momentum, while contracting bars can indicate a weakening trend or potential reversal.
Insights and Practical Tips
Divergence: If price makes a new high/low that isn’t confirmed by the MACD, it could indicate a trend reversal.
Combine with Other Indicators: MACD is more effective when combined with volume, RSI, or support/resistance analysis.
Timeframes: Works on all timeframes—intraday, daily, weekly.
AI Enhancement: Tools like Stockaivisor can analyze MACD signals across many assets, spotting complex patterns or early divergences that manual analysis might miss.
Example: If Tesla’s MACD line crosses above the Signal Line while the histogram starts to increase and the RSI also moves upward, this multi-indicator confirmation strengthens a bullish case.
Bollinger Bands
Bollinger Bands are a popular technical analysis tool that provides a relative definition of high and low prices. Developed by John Bollinger, they consist of a middle band (usually a simple moving average) and two outer bands (standard deviations above and below the middle band). The bands dynamically expand and contract based on market volatility.
Why Are Bollinger Bands Important?
Volatility Measurement: Bands widen during volatile periods and contract during quiet markets, helping traders “see” volatility in real-time.
Overbought/Oversold Signals: Prices near the upper band are considered high (potentially overbought); prices near the lower band are considered low (potentially oversold).
Trend Identification: Can signal the start of new trends when prices break above/below the bands.
Pattern Recognition: Useful for spotting “squeezes” (periods of low volatility) that often precede big moves.
Bollinger Bands Formula
There are three main components:
Middle Band: SMAn (Simple Moving Average, typically 20 periods)
Upper Band: SMAn+(K×σn)
Lower Band: SMAn−(K×σn)
where:
SMAn = n-period simple moving average (usually 20)
σn = standard deviation over the same n periods
K = number of standard deviations (usually 2)
Formulas:
Middle Band=SMA20
Upper Band=SMA20+2×σ20
Lower Band=SMA20−2×σ20
How to Use Bollinger Bands in Trading
Band Touches:
Price touches upper band: Asset might be overbought (watch for reversal or breakout).
Price touches lower band: Asset might be oversold (watch for reversal or breakdown).
The Squeeze: When bands contract, it signals low volatility and a possible big move ahead.
Breakouts: Price closing outside the bands can signal a strong trend, but is not a standalone buy/sell signal—confirmation is needed.
Mean Reversion: Many traders use band touches as a cue for mean-reverting trades, expecting price to return toward the moving average.
Insights and Practical Tips
Not Standalone: Bollinger Bands work best with other indicators (e.g., RSI, MACD) for confirmation.
Squeeze Strategy: Watch for periods when the bands are very close together (“the squeeze”)—these often precede large price movements.
Volatility Scanning: AI-powered tools like Stockaivisor can monitor hundreds of assets for squeezes, band breakouts, and volatility shifts in real time.
Multiple Timeframes: Effective across daily, weekly, and intraday charts.
Example: If Apple’s stock enters a Bollinger Band squeeze (bands close together) and then breaks strongly above the upper band with high volume, this may indicate the start of a new uptrend. An AI tool can flag this setup across thousands of stocks instantly.
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Moving Averages
Moving averages are among the most widely used technical indicators. They smooth out price data to help traders identify trends by filtering out short-term market noise. The two most common types are:
Simple Moving Average (SMA): An arithmetic average of prices over a set period.
Exponential Moving Average (EMA): A weighted average that gives more significance to recent prices, making it more responsive to new information.
Why Are Moving Averages Important?
Trend Identification: They help visualize the direction of the prevailing trend—uptrend, downtrend, or sideways.
Support & Resistance: MAs often act as dynamic support/resistance levels.
Signal Generation: Crossovers (when a short-term MA crosses a long-term MA) can trigger buy/sell signals.
Smoothing Effect: Reduce the impact of short-term volatility and market “noise.”
Formulas
Simple Moving Average (SMA):
SMAn=P1+P2+⋯+Pnn
where P1,P2,…,Pn are the closing prices over nn periods.
Exponential Moving Average (EMA):
EMAt=α×Pt+(1−α)×EMAt−1
where Pt is the current price, α=2/n+1 (smoothing factor), and n is the number of periods.
How to Use Moving Averages in Trading
Trend Direction:
Price above MA: uptrend bias.
Price below MA: downtrend bias.
Crossovers:
Golden Cross: Short MA crosses above long MA (bullish signal).
Death Cross: Short MA crosses below long MA (bearish signal).
Dynamic Support/Resistance:
Prices often “bounce” off moving averages in trending markets.
MA Envelopes & Bands:
Use MA-based channels (e.g., Keltner, Envelope) to detect overbought/oversold conditions.
Insights and Practical Tips
SMA vs EMA:
SMA is smoother but reacts more slowly to price changes.
EMA responds faster to recent price movements, making it preferable for shorter-term trading.
Multiple Timeframes:
Common periods: 20, 50, 100, and 200 days (or equivalent in intraday/minute bars).
Combining with AI Tools:
AI platforms like Stockaivisor can monitor moving average crossovers, trend changes, and volatility filters across thousands of stocks, providing timely alerts.
False Signals:
Relying solely on MAs can lead to whipsaws in sideways markets. Combine with other indicators (like RSI or MACD) for confirmation.
Popular Trading Setups:
Trend-following: Trade in the direction of the slope of the MA.
Crossover strategies: Enter on bullish or bearish crossovers.
Example: A graph with orange lines
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Here is the graph showing the stock price and its 20-day simple moving average (SMA) on the same chart.
Volume
Volume represents the total number of shares, contracts, or lots traded during a given time period. In the context of stocks, it shows how many shares have changed hands between buyers and sellers within a set timeframe (e.g., a day, an hour, or a minute).
Why Is Volume Important?
Market Confirmation: Volume is used to confirm price trends and chart patterns. Significant price movements with high volume are more likely to be sustainable.
Strength of Moves: Sharp price increases or decreases with high volume indicate strong conviction among market participants.
Early Signal of Reversals: Unusually high or low volume can signal potential reversals or the end of a trend.
Liquidity Gauge: Higher volume generally means more liquidity, which allows for easier entry and exit with minimal price slippage.
Volume Formulas
Volume itself is not calculated; it is reported by exchanges. However, technical indicators built on volume include:
On-Balance Volume (OBV):
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Volume Moving Average:
Volume MAn=∑ni=1Volumei/n
How to Use Volume in Trading
Trend Confirmation:
Rising price with rising volume: strong trend confirmation.
Rising price with falling volume: trend may be losing strength.
Breakouts and Fakeouts:
Breakouts from chart patterns (like triangles or ranges) on high volume are more reliable.
Breakouts with low volume are more likely to fail.
Divergence:
Price makes a new high, but volume does not: possible weakening of the trend.
Volume Spikes:
Unusually large volume can signal news events, earnings, or institutional trading activity.
Volume Dry-Ups:
Periods of very low volume may precede significant price moves as traders wait for direction.
Insights and Practical Tips
Integrating with AI Tools:
Platforms like Stockaivisor can automatically flag abnormal volume, identify accumulation/distribution patterns, or combine volume signals with other indicators (like moving averages or RSI) for smarter alerts.
Relative Volume:
Comparing today’s volume to average volume (e.g., 10-day average) helps spot unusual activity.
Volume and Volatility:
High volume often goes hand-in-hand with increased volatility—use caution if liquidity surges around news or earnings.
Volume with Candlestick Patterns:
Volume adds context to candlestick signals (e.g., bullish engulfing on high volume is stronger).
Example: A graph showing a line graph
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Here is a visual showing the stock price (line, left y-axis) and volume indicator (bars, right y-axis) on the same graph. This combined view helps investors see the relationship between price movements and trading volume at a glance