Knowledge Base

Master the fundamentals of professional trading

5Topics

50+Concepts

20+Patterns

Technical Indicators

VWAP, RSI, MACD, Bollinger Bands, ATR, and Initial Balance

Moving Averages

Simple Moving Average (SMA): Arithmetic mean of prices over N periods. Equal weight to all data.

Exponential Moving Average (EMA): Weighted average giving more importance to recent prices. More responsive.

Period	Use Case
9 EMA	Ultra-responsive, immediate trend
20 EMA/SMA	Short-term trend, day trading
50 SMA	Medium-term trend
200 SMA	Long-term trend, major S/R

Golden Cross — Shorter MA crosses above longer MA (bullish signal)

Death Cross — Shorter MA crosses below longer MA (bearish signal)

Popular combinations: 50/200 day, 9/21 EMA, 20/50 SMA

VWAP (Volume Weighted Average Price)

VWAP calculates average price weighted by volume, providing a more accurate reflection of true value. Resets each session.

VWAP = Cumulative(Typical Price × Volume) / Cumulative(Volume)

Standard deviation bands extend above/below VWAP, representing areas of overextension.

Price above VWAP: Bullish bias
Price below VWAP: Bearish bias
Touches of upper band: Potential mean reversion short
Touches of lower band: Potential mean reversion long

Institutional traders use VWAP as benchmark—buying below or selling above is considered good execution.

RSI (Relative Strength Index)

Momentum oscillator measuring velocity of price movements. Ranges 0-100.

Above 70 — Overbought—potential selling opportunity

Below 30 — Oversold—potential buying opportunity

At 50 — No clear trend

Bullish Divergence: Price makes lower low, RSI makes higher low. Suggests upward reversal.

Bearish Divergence: Price makes higher high, RSI makes lower high. Suggests downward reversal.

Most robust after overbought/oversold readings.

MACD (Moving Average Convergence Divergence)

MACD Line — 12 EMA - 26 EMA

Signal Line — 9-period EMA of MACD Line

Histogram — MACD Line - Signal Line (visualizes the gap)

Zero Line — Baseline where MACD equals zero

Bullish Crossover: MACD crosses above Signal Line—upward momentum

Bearish Crossover: MACD crosses below Signal Line—downward momentum

Histogram: When it peaks and declines, a crossover is approaching. Early warning system.

Bollinger Bands

Middle Band — 20-period SMA

Upper Band — Middle + (2 × Standard Deviation)

Lower Band — Middle - (2 × Standard Deviation)

~95% of price action occurs within the bands under normal conditions.

When bands contract to their narrowest point, it signals low volatility—often followed by explosive moves.

Watch for tightest width in 6 months
Wait for price to break outside bands
Confirm with volume increase
Direction determined by breakout side

ATR (Average True Range)

ATR measures volatility by capturing the full range of price movement, including gaps.

True Range = Greatest of: High-Low, High-Previous Close, Previous Close-Low

ATR = Moving average of True Range (typically 14 periods)

ATR-based stops adapt to current volatility:

1.5× ATR: Tighter stops, more frequent stop-outs
2.0× ATR: Balanced approach
3.0× ATR: Wider stops, fewer stop-outs

Example: ATR = 2.00, entry at 100, 2× ATR stop = 96

Position Size = Risk Amount / (ATR × Multiplier)

This maintains consistent risk regardless of volatility—smaller positions in high volatility, larger in low volatility.

Initial Balance (IB)

The price range established during the first hour of RTH (8:30-9:30 AM CT for ES/NQ).

IBH — Initial Balance High

IBL — Initial Balance Low

IB Range — IBH - IBL

Extensions project beyond IB as profit targets:

100%: IBH + IB Range (or IBL - IB Range)
150%: 1.5× extension
200%: 2× extension

Normal Day — Price stays within IB—range trade

Neutral Day — IB expands both ways—failed breakouts

Normal Variation — IB expands 1-2× in one direction

Trend Day — Strong directional move, extensions reached

Pro Tip

No single indicator is reliable alone. Combine multiple indicators for confirmation—RSI divergence at a VWAP band with volume increase is far more reliable than any single signal.