What are indicators, and what are their limits?
A technical indicator is a line or value calculated from price and volume data with a formula. It summarises information that is already on the chart in a different form; it adds no new information and usually lags price. Knowing which question it answers and where it can mislead is the first step to reading it well.
What is an indicator?
An indicator runs open, high, low, close and volume data through a formula. The result is either a line drawn over price (a moving average, for example) or a value shown in a separate pane (RSI, for example). Both are a summary of information the candles already contain.
Because most indicators use averages or ratios of past candles, they lag price. By the time an indicator changes direction, price has usually made that change a few candles earlier. An indicator's value comes not from predicting price but from answering one question in a consistent, measurable way.
Types of indicator
- Trend indicators: show the general direction of price by smoothing it. Moving averages, MACD and ADX belong here.
- Momentum indicators: measure the speed and one-sidedness of a move. RSI and the MACD histogram belong here.
- Volatility indicators: measure how widely price swings. ATR and Bollinger Bands belong here.
- Volume indicators: summarise the amount traded behind a price move. OBV and VWAP belong here.
Some indicators fit more than one group. MACD describes both trend and momentum; VWAP uses both price and volume.
Settings change the result
Every indicator has one or more settings: 14 for RSI, 12, 26, 9 for MACD, and so on. These are common defaults, not correct values. A shorter period makes an indicator faster but noisier; a longer one makes it calmer but slower to react.
It is also normal for the same indicator to give different values on different timeframes and with data from different exchanges. Stating the setting and the timeframe when sharing a reading makes it clearer.
Several indicators are not several pieces of evidence
RSI, MACD and a moving average can all point to a rise at the same time. That looks like three separate pieces of evidence, but all three are calculated from the same closing prices. Showing the same information in three forms does not make the information any stronger.
Indicators that use different information (one calculated from price and one from volume, for example) complement each other more. Even so, they all describe the same past; none of them makes the future certain.
What it shows, what it does not prove
What it shows
- A particular feature of the price and volume history (direction, speed, range, participation) in a measurable way
- How the same measure changes over time
- Differences that are easy to miss by eye, such as price rising while its pace slows
What it does not prove
- What price will do next; indicators are calculated from past data
- That agreement between several indicators built from the same data is independent confirmation
- That one setting or threshold is more correct than others
The MarketLevelMap view
How it relates to zones
Indicators describe how price is moving; support and resistance zones describe where price has reacted. The two answer different questions and complement each other when read together.
Momentum fading or volume rising on the way to a zone are extra observations that help interpret how price behaves there. But whether the zone holds is still shown by closes relative to its edges; an indicator does not replace that reading.
For general information only. Not investment advice.Last updated: