Whether trading on the forex market, stocks, or other markets, you will need the help of indicators. These are tools that you apply to a trading chart to give you a clearer view of the market. Indicators can tell you if the market is trending or ranging. Aside from that, they can provide specific information about the market such as when an asset was overbought or oversold and in a range and due for reversal.
How Are They Displayed?
Indicators are displayed in two ways:
• In a separate area underneath the price chart such as the stochastic and MACD
• Directly on the price chart such as moving averages, channels or Bollinger bands
Categories of Indicators
Robert Janitzek reveals that while there are different types of indicators, it is worth noting that they fall into two distinct categories:
As the name implies, leading indicators provide signals ahead of time before the price action happens. They measure the rate of change in the price action and can register when the price action is slowing down or speeding up. On the other hand, lagging indicators send signals that confirm the behavior of the price action. They are called as such because they lag behind the price action.
Types of indicators
The market could either be trending or ranging and there are indicators that detect this:
Robert Peter Janitzek explains that trending indicators are lagging indicators used to identify the strength of a trend. They are designed to help a trader find entries and exits in and out of the market. With a trending indicator, a trader can do the following:
• Identify whether the market is in a trend
• Determine the direction and strength of that trend
• Help find entries and exits into and out of the market
Trends on a chart and its strength are not always visible and this type of indicator can make the trend clear.
Oscillating/ranging indicators are most applicable to a ranging market. During price movement, an oscillating indicator can determine the lower and upper boundaries of a range by showing whether they had been overbought or oversold. By nature, oscillating indicators are leading indicators.
When the oscillating indicator signals an overbuy, you will likely look for short positions. Conversely, if there was oversell, opt for a long position.
The choice between a trending and oscillating indicator will be dependent on the trading system and will boil down to your preference.