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I'm learning about the SMA/EMA technical analysis, as well as, indicators such as Bollinger Bands, Stochastic Oscillators, MACD, etc.

How do you know which one to use and which to weigh more over each other?

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They are different things, it depends on what you are looking for:

Bollinger bands are constructed based on the standard deviation of closing prices over the last n periods. An analyst can draw high and low bands a chosen number of standard deviations (typically two) above and below the n-period moving average. The bands move away from one another when price volatility increases and move closer together when prices are less volatile. Bollinger bands are viewed as useful for indicating when prices are extreme by recent standards on either the high or low side. Prices at or above the upper Bollinger band may be viewed as indicating an overbought market, one that is "too high" and likely to decrease in the near term. Likewise, prices at or below the lower Bollinger band may be viewed as indicating an oversold market, one that is "too low" and likely to increase in the near term.

Moving average convergence/divergence. MACD oscillators are drawn using exponentially smoothed moving averages, which place greater weight on more recent observations. The "'MACD line" is the difference between two exponentially smoothed moving averages of the price, and the "signal line" is an exponentially smoothed moving average of the MACD line. The lines oscillate around zero but are not bounded. The MACD oscillator can be used to indicate overbought or oversold conditions or to identify convergence or divergence with the price trend. Points where the two lines cross can be used as trading signals. The MACD line crossing above the smoother signal line is viewed as a buy signal and the MACD line crossing below the signal line is viewed as a sell signal.

Stochastic oscillator. A stochastic oscillator is calculated from the latest closing price and highest and lowest prices reached in a recent period, such as 14 days. In a sustainable uptrend, prices tend to close nearer to the recent high, and in a sustainable downtrend, prices tend to close nearer to the recent low. Stochastic oscillators use two lines that are bounded by 0 and 100. The "%Ku line is the difference between the latest price and the recent low as a percentage of the difference between the recent high and low. The "%D" line is a 3-period average of the %K line. Technical analysts typically use stochastic oscillators to identify overbought and oversold markets. Points where the %K line crosses the %D line can also be used as trading signals in the same way as the MACD lines.

From: Schwerser Notes - adapted

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  • $\begingroup$ Thank you for your response. With each of these, they can dictate markets that are overbought and oversold. My question regards using multiple indicators to make decisions and how to weigh each of the indicators with respect to one another. For instance, if I were to use bollinger bands to understand the support and resistance of a stock and use the MACD line for signals, if they either contradict one another or the MACD oscillator proves an overbought market, but the price has not reached the bottom bollinger bands, how do I know which to 'trust'? $\endgroup$ – user2874945 Aug 20 '15 at 15:02
  • $\begingroup$ You don't. Technical analysis is an empty theory there is no way to test the superior performance of an indicator in relation to another except for backtesting. Even then you are unlikely to find good Out of Sample results. $\endgroup$ – phdstudent Aug 20 '15 at 15:16

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