Indicators are tools that help you interpret price behavior, not predict the future.
They are mathematical calculations applied to price or volume data and are used to provide additional perspective on trends, momentum, and strength. While indicators can be useful, they should support price analysis, not replace it.
This lesson introduces indicators in a responsible, practical way, focusing on understanding rather than signal-chasing.
What Are Indicators?
Indicators are visual tools plotted on or below price charts to help answer questions such as:
- Is the trend strong or weak?
- Is momentum increasing or slowing?
- Is buying or selling pressure dominant?
- Is the market overextended?
📌 Key principle:
Indicators simplify information — they do not create certainty.
Why Indicators Exist
Markets generate vast amounts of price data. Indicators help by:
- Filtering noise
- Highlighting trends and momentum
- Adding confirmation to price-based observations
- Helping with consistency and discipline
📌 Professional traders use very few indicators, often just one or two.
Important Rule Before Using Indicators
Price comes first. Indicators come second.
Indicators are derived from price — meaning:
- They lag price
- They cannot lead price
- Misuse can cause late entries or false confidence
📌 Always analyze:
- Trend
- Support & resistance
- Then indicators (if needed)
Common Beginner Indicators (You Only Need These)
1️⃣ Moving Averages (Most Important Indicator)
A moving average shows the average price over a chosen period, smoothing short-term fluctuations.
(Suggested image: Price chart with 50-day and 200-day moving averages)
Common Types
- Simple Moving Average (SMA) – equal weight to all prices
- Exponential Moving Average (EMA) – more weight to recent prices
Common Periods
- 20 → short-term trend
- 50 → medium-term trend
- 200 → long-term trend
How Moving Averages Are Used
- Price above MA → bullish bias
- Price below MA → bearish bias
- MA acting as support/resistance → trend strength
📌 Beginner tip:
Use moving averages to identify trend direction, not buy/sell signals.
Intermediate Insight
- Flat moving average → sideways market
- Steep moving average → strong momentum
- Multiple MAs aligned → trend confirmation
Advanced Perspective
Professionals use moving averages to:
- Identify trend structure
- Filter trades in the direction of higher timeframe bias
- Avoid trading against dominant trends
📌 The 200-day MA is widely watched by institutions.
2️⃣ Relative Strength Index (RSI)
RSI measures momentum, not value.
It oscillates between 0 and 100.
(Suggested image: RSI indicator below price chart with 30 & 70 levels marked)
Basic RSI Levels
- Above 70 → overbought
- Below 30 → oversold
- Around 50 → neutral
📌 Critical beginner mistake:
Overbought ≠ sell
Oversold ≠ buy
Correct Way to Think About RSI
- Strong trends can stay overbought/oversold for long periods
- RSI is best used to:
- Confirm trend strength
- Spot momentum divergence
- Avoid chasing extended moves
Intermediate Insight
- RSI above 50 → bullish momentum
- RSI below 50 → bearish momentum
- RSI divergence → possible momentum weakening
Advanced Insight
Experienced traders focus on:
- RSI behavior relative to trend
- Range shifts (bullish vs bearish ranges)
- RSI failure swings (advanced concept)
📌 RSI works best with trends, not against them.
3️⃣ Volume (Often Ignored, Very Powerful)
Volume shows how much participation is behind a price move.
(Suggested image: Price chart with volume bars below)
Why Volume Matters
- High volume → strong conviction
- Low volume → weak participation
- Price move + volume confirmation → higher reliability
Practical Examples
- Price breakout + high volume → strong move
- Price breakout + low volume → likely false breakout
- Rising price + falling volume → momentum weakening
Advanced Insight
Institutions leave footprints through volume behavior.
Professionals watch:
- Volume at support/resistance
- Volume spikes during breakouts
- Declining volume during pullbacks (healthy trend)
📌 Volume confirms intent, not direction.
Indicators vs Price (Reality Check)
| Price Action | Indicators |
|---|---|
| Leads | Lags |
| Shows reality | Shows interpretation |
| Must be understood | Must be controlled |
📌 Indicators support decisions, they do not replace thinking.
Common Indicator Mistakes (Avoid These)
❌ Using too many indicators
❌ Searching for perfect indicator settings
❌ Blindly following indicator signals
❌ Ignoring trend and price structure
✔ Use 1–2 indicators max
✔ Keep charts clean
✔ Focus on consistency
✔ Respect price first
Best Practices (All Levels)
- One trend indicator (Moving Average)
- One momentum indicator (RSI)
- Optional: Volume
- Same settings, same timeframe
- No indicator hopping
📌 Consistency beats complexity.
Key Takeaways from Lesson 6
- Indicators are tools, not predictors
- Moving averages help identify trends
- RSI measures momentum, not value
- Volume confirms strength
- Price action always comes first
- Fewer indicators = better clarity
What’s Next?
Now that you understand direction (trends) and confirmation (indicators), the next step is learning how to combine everything safely.
👉 Proceed to Lesson 7 – Technical Analysis vs Investing
👈 Go Back to Technical Analysis Basics