Indicators: how they really work
An indicator is a formula that summarises past price into a line or a number. It doesn't foresee the future: it helps you describe the present. Understanding that saves you years of frustration.
No indicator predicts the market. They're all computed from prices that have already happened (they «lag»). They're for putting objective rules on what you see, not for seeing the future. Anyone selling you an «infallible» indicator is selling hype.
Trend indicators
- Moving average (MA / EMA)
- The average price of the last N candles. It smooths the noise and tells you where the market leans. If price is above its 200 average, the context is bullish. Its crossover (a fast one crossing a slow one) is a classic trend-change signal — with plenty of false signals in ranging markets.
- MACD
- The difference between two averages, with a signal line. It measures the momentum of the trend: when it accelerates or fades. Useful to confirm, not to predict reversals.
- ADX
- Measures the strength of the trend (not its direction). High ADX = clear trend; low ADX = a market with no direction (range). A great filter: it tells you whether your trend strategy even makes sense right now.
- Ichimoku
- A complete system (several lines and a «cloud») to see trend, support/resistance and momentum at a glance. Powerful but dense; it takes time to learn.
Overbought/oversold (oscillators)
- RSI
- From 0 to 100. Above 70 is usually «overbought»; below 30, «oversold». Beware the myth: in a strong trend, RSI can stay «overbought» for weeks while price keeps rising. It's more useful for measuring momentum than for catching reversals.
- Stochastic
- Similar to RSI: it places the close within the recent range. Good in ranging markets, treacherous in trends.
- Williams %R
- Another overbought/oversold oscillator, cousin of the stochastic, on a −100 to 0 scale.
Volatility indicators
- ATR (Average True Range)
- How much price moves on average per candle. It gives no entry signals, but it's gold for risk: placing your stop-loss at X times the ATR adapts your protection to the current real volatility. Almost every serious system uses it.
- Bollinger Bands
- A moving average with two bands at a distance (based on volatility). Price tends to move within them. When they narrow («squeeze»), a strong move often follows. Used both for reversion (touching a band) and breakout.
Professionals don't hunt for «the magic indicator». They combine a few coherent ones: one for context (trend or range, e.g. ADX + the 200 average), one for the signal (e.g. RSI or a breakout) and the ATR for risk. Piling on ten indicators doesn't give precision: it gives paralysis and overfitting. Less is more.