Question 1

What is the RSI indicator?

Accepted Answer

RSI (Relative Strength Index) is a momentum oscillator that measures the speed and magnitude of price changes on a scale of 0 to 100. Readings above 70 indicate overbought conditions, while readings below 30 indicate oversold conditions. It uses a default period of 14 bars and is calculated as: RSI = 100 − [100 / (1 + Average Gain / Average Loss)].

Question 2

What does a Bollinger Band squeeze mean?

Accepted Answer

A Bollinger Band squeeze occurs when the upper and lower bands contract toward the middle SMA, indicating a period of low volatility. Because volatility is cyclical, a squeeze typically precedes a significant price breakout in either direction. The squeeze becomes especially powerful when Bollinger Bands contract inside Keltner Channels.

Question 3

What is the difference between SMA and EMA?

Accepted Answer

SMA (Simple Moving Average) gives equal weight to all periods, making it smoother but slower to react to new price data. EMA (Exponential Moving Average) uses a multiplier of 2/(n+1) to give more weight to recent prices, making it more responsive. EMA is preferred for shorter-term trading while SMA suits longer-term trend analysis.

Question 4

What is VWAP and why do traders use it?

Accepted Answer

VWAP (Volume Weighted Average Price) is the average price weighted by volume, reset each trading day. It is calculated as the sum of (Typical Price × Volume) divided by total volume. Institutional traders use it as a benchmark — buying below VWAP is considered favorable value, selling above is favorable pricing. Price above VWAP signals bullish intraday bias.

Question 5

What does ADX measure in technical analysis?

Accepted Answer

ADX (Average Directional Index) measures the strength of a trend on a scale of 0–100, without indicating its direction. An ADX above 25 signals a strong trend is present, while below 20 suggests a weak or ranging market. It is used alongside +DI and -DI lines which provide the directional component. Rising ADX means the trend is strengthening; falling ADX means it is weakening.

Question 6

What is ATR and how is it used for stop losses?

Accepted Answer

ATR (Average True Range) measures market volatility by calculating the exponential moving average of the True Range over 14 periods. True Range is the largest of: current High minus Low, absolute High minus previous Close, or absolute Low minus previous Close. Traders typically multiply ATR by 1.5–2 to set stop loss distances, ensuring stops are placed beyond normal price noise.

Question 7

How does the Ichimoku Cloud work?

Accepted Answer

The Ichimoku Cloud is a complete trading system with five components: Tenkan-sen (9-period midpoint), Kijun-sen (26-period midpoint), Senkou Span A (average of Tenkan and Kijun, projected 26 periods forward), Senkou Span B (52-period midpoint, projected forward), and the Chikou Span (current close plotted 26 periods back). Price above the cloud is bullish; below is bearish. The cloud also acts as future support and resistance.

Question 8

What are Fibonacci retracement levels?

Accepted Answer

Fibonacci retracement levels are horizontal lines drawn at key ratios between a swing high and swing low: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels often act as support or resistance during price pullbacks. The 61.8% level, derived from the golden ratio, is considered the most significant. A shallow retracement to 38.2% signals a strong trend; a deep retracement to 61.8–78.6% may indicate a potential trend reversal.

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