In the previous lesson, you learned to analyze charts with the help of drawing instruments. You can enhance your analysis further by using technical indicators.
An indicator is a technical analysis tool based on a mathematical formula. With indicators, you don’t need to calculate anything. Just click the Technical Analysis icon in the chart window on Olymptrade and pick an indicator. It will show key information about the price’s dynamics in no time.
Reasons to use indicators
Imagine indicators as your personal trading assistants. They analyze all that complex market data, crunch the numbers, and give you a simpler picture of what’s going on. Here’s what they can do:
1. Spot trends
Trend indicators such as Simple Moving Average can help you figure out which way the market’s moving. If the price is above the SMA, there’s an uptrend. If it’s below the SMA, you are looking at a downtrend.
2. Determine if an asset is overbought or oversold
Indicators known as oscillators can tell you when the market’s gone overboard. For example, the Relative Strength Index (RSI) shows when the price has moved upward too fast. When the RSI rises above 70, that means the asset is overbought and its price may soon decrease. Conversely, if the RSI falls below 30, the asset is oversold and its price might increase.
3. Reduce noise
Price charts can often seem chaotic, with the price moving erratically, particularly in intraday timeframes like 30m. Indicators can smooth out the price data, making it easier to see the underlying trend or patterns.
4. Produce signals
Indicators can provide signals for when to enter or exit a trade. For example, a crossover in Moving Averages might signal a good time to enter a trade, while reaching an overbought or oversold level on the RSI could suggest it’s time to exit.
5. Confirm trade signals
Indicators can be used to confirm other technical analysis findings. For example, a high reading on a Volume indicator can confirm a price breakout, meaning that the price has broken a support or resistance level.
The flipside of indicators
Although indicators are handy, they aren’t fortune tellers. Note that these tools don’t rely on external information, they just visualize what’s already on the price chart. As a result, trade signals generated by some indicators may be delayed.
It’s important to understand the benefits and limitations of indicators. There’s no single best indicator that will do all the work for you, so don’t waste your time looking for one. Remember that each indicator has its own function. Find out what that function is before using a tool, and the indicator will do its part in helping you make an informed trading decision.
Finally, use two or three indicators to confirm a signal. If all the indicators you’re using signal the same thing at the same time, the signal is more reliable.
Tips for beginners
If you’re just starting with indicators, mind these recommendations:
1. Keep it simple. You don’t need to dive into complex indicators right away. Start with the easy ones like SMA or RSI. Get a feel for them before you explore more complicated stuff.
2. Avoid overusing indicators. Don’t crowd your chart with too many indicators. It could get confusing, and you might get mixed signals. Pick a few indicators of different types, for example, Moving Average and an oscillator.
3. Look at the bigger picture. Don’t let indicators be the only voice in your trading decisions. Pair them with other analysis techniques, like price action and fundamental analysis. Indicators make up only part of your trading tool kit, not the whole toolbox.
And there you go! Indicators aren’t all that intimidating, are they? Sure, they’re a new concept, but with a bit of practice, you’ll start to feel more at home with them.
Next
In the next few lessons, you’ll learn how technical indicators and other things are combined to create trading strategies.