What Is Indicator?
A trading indicator is a mathematical calculation applied to price, volume, or open interest data that helps identify market conditions, trends, and potential entry/exit points. Indicators fall into categories: trend indicators (moving averages, ADX), momentum oscillators (RSI, MACD, Stochastic), volatility indicators (Bollinger Bands, ATR), and volume indicators (OBV, VWAP).
How Indicator Works
Indicators are either leading (signaling before price moves — RSI, Stochastic) or lagging (confirming after price moves — moving averages). Leading indicators provide early signals but more false positives; lagging indicators are more reliable but delayed. Most professional systems use a combination of both types, along with price action, for confirmation.
Why It Matters for Traders
The most common mistake with indicators is using too many — leading to analysis paralysis and conflicting signals. Most successful traders use 2-4 indicators that complement each other (e.g., one trend, one momentum, one volume). The indicators themselves don't matter as much as understanding what they measure and how to interpret them in context.
