What is an indicator?
What is an indicator? How do you predict what the market will do in the future? Instead of losing money with ineffective guesswork, you can use indicators to determine what you should do.
In general, an indicator is any instrument that allows you to predict future market movements. There are, however, fundamentally different types of indicators. This article will introduce you to the most commonly used types of indicators.
What is an indicator and how do you put it to use?
The most fundamental type of indicator are candlesticks. Candlesticks are a form to display market movements in a price chart. Each candlestick aggregates an adjustable period of market movements. Candlesticks form simple and complex candlestick formations that allow you to anticipate what the market will do next.
The market moves in trends. Trends are zigzag movements that take the market into a certain direction by creating consecutively higher (in an uptrend) or lower (in a downtrend) highs and lows. By recognizing these trends and profiting from them, either as a trend follower or a swing trader, you can make accurate and reliable predictions about future market movements.
Resistance and support levels
Resistance and support levels can set strong limitations to the market movements: They work as barriers the market cannot break through. Recognizing these barriers can provide you with great insight to what will happen next.
Continuation patterns emerge when a trend has to create new momentum before it can continue in its main direction. In these cases the market creates a short lived sideways movement or even a short trend in the opposite direction of the main trend.
The ability to recognize continuation patterns can save you from bad investments in supposed trends that in reality are continuation patterns. Since continuation patterns usually occur around half time of any trend, they can also give you a great indication for how long a trend will last. This enables you to invest in highly profitable touch options based on continuation patterns.
Technical indicators are a large group of indicators with many sub-groups. The one thing all technical indicators have in common is that they use market data to calculate a statement about the current market environment. The difference in technical indicators is which market data they use, how they calculate it, and how they display their result.
Moving averages are the most basic of all technical indicators. A moving average calculates the average price of the last periods and draw it into the chart. By repeating the process for all of the past candlesticks, they create a line. You can use this line as a resistance / support line, trade crossovers from two moving averages, or even the three moving average crossover technique.
Oscillators are indicators that are perfect to anticipate market movements. Oscillators are displayed in a separate window below your price chart. They calculate a value between 0 and 100. Whether the value is closer to 0 or 100 can allow you great insight to what is currently happening in the market.
While there are many different types of oscillators, most of oscillators determine whether the market is currently overbought or oversold. As soon as the market enters either extreme a turnaround in the opposite direction is highly. An even more significant signal is a divergence between the oscillator and the market.
Some oscillators also try to measure significant market data. Momentum indicators such as the average true range (ATR) try to measure how far the market has moved per period on average. This information can help you invest in touch and boundary options.