Technical Indicator: A mathematical process applied to certain features of historical price action so as to determine the strength, volatility, momentum and volume of current price movements.

In technical analysis, indicators are tools you can use to make more informed trading decisions. They are calculations which take into account the price and the volume of an asset to provide you with more information about price movement and direction, as well as to give buy and sell signals.

There are two types of indicators:

  • Leading indicators, or, oscillators
  • Lagging indicators

A leading indicator is used to give a signal before a new trend begins, or before the current trend reverses.

A lagging indicator is more of a confirmation tool, giving a signal after a trend has started.

Now, oscillators are the most popular type of indicators. They are bound within a range and give a signal whenever an asset is overbought or oversold, which traders interpret as signals to sell or buy respectively.

Technical indicators help traders a lot since they can point out the beginning, weakening or reversal of a trend, identify momentum and volatility and identify good opportunities for opening new positions or closing existing ones. There is, however, a downside, which is that indicators are not always correct. In fact, leading indicators are prone to giving bogus signals, while lagging indicators, which give out signals after the beginning of a trend, may do so a little bit too late. Nevertheless, they are key to technical analysis and can improve your trading style immensely when employed accurately.

Did you know?

If overwhelmed by pessimism and falling prices, the FX market is defined as “bearish”, while if characterised by optimism and rising prices, it is called “bullish”. These two terms derive from the way in which bears and bulls attack their opponents, with the former swiping its paws downwards and the latter thrusting its horns upwards.

Word of the day
"Simple Moving Average (SMA)" - A representation of an asset’s average price over a period of time.
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