Technical Indicators: Tools for Signal Generation

Essential Technical Indicators

Technical indicators are mathematical calculations based on price and volume that help identify trends, reversals, and momentum. They're the building blocks of most algorithmic trading signals.

Simple Moving Average (SMA)

SMA smooths out daily price noise to show the underlying trend. A rising SMA means the market is moving higher on average. A falling SMA means lower on average.

df['SMA_20'] = df['Close'].rolling(window=20).mean()  # 20-day SMA
df['SMA_50'] = df['Close'].rolling(window=50).mean()  # 50-day SMA

# Golden cross: SMA_20 crosses above SMA_50 (bullish signal)
df['Signal'] = 0
df.loc[df['SMA_20'] > df['SMA_50'], 'Signal'] = 1  # Buy
df.loc[df['SMA_20'] < df['SMA_50'], 'Signal'] = -1  # Sell

Exponential Moving Average (EMA)

Like SMA but gives more weight to recent prices. Reacts faster to price changes than SMA.

RSI: Relative Strength Index

RSI ranges from 0 to 100. RSI > 70 = overbought (potential sell). RSI < 30 = oversold (potential buy).

def calculate_rsi(prices, period=14):
    deltas = prices.diff()
    seed = deltas[:period+1]
    up = seed[seed >= 0].sum() / period
    down = -seed[seed < 0].sum() / period
    rs = up / down
    rsi = 100 - 100 / (1 + rs)
    return rsi

df['RSI'] = df['Close'].rolling(window=14).apply(
    lambda x: calculate_rsi(x, 14), raw=False
)

Bollinger Bands

Bands expand when volatility increases, contract when volatility decreases. Price touching upper band = overbought. Price touching lower band = oversold.

MACD: Moving Average Convergence Divergence

MACD crossover: When MACD line crosses above signal line = bullish. Below signal line = bearish.