Why Do We Use Indicators?
Traders use indicators as secondary tools. They’re added to charts to help measure things like momentum, trend, changes in price and volatility. The role of an indicator is to help you as a trader in interpreting the data in a simpler and clear manner. They are not meant to over-ride the chart analysis. You need to be able to analyze charts from a bare stand-point without indicators. Indicators will not replace your need to identify trend, support, resistance and pivot points on your own. What they can do is help confirm your readings, give you signals for entry and help explain the conditions of the chart.
Indicators are measured specifically from the chart settings you’re using. If you have a daily chart up the indicators will produce readings specific to that chart time frame. If you change the time from to 5 minutes per candlestick then the indicators will now measure their readings from that chart. Learn to use this information.
Strengths of Indicators
One of the greatest strengths an indicator can bring is its utility. It can make it simpler to see complex readings in the stock. Is momentum changing? Certain indicators will show you this clearly. Is the trend strengthening or weakening? The use of indicators can aid you in seeing this, sometimes before your technical analysis picks up on it from candlestick patterns alone. Indicators are powerful tools but they also have some inherent flaws.
Weaknesses of Indicators
One of the weaknesses of indicator analysis is that it is by definition lagging. All indicators are lagging indicators. They measure data that has already happened. That’s how they produce their graph. They pull information from the history of candlesticks, price, moving averages and volatility and create a reading from it. This is old information – still valuable – but old.
Another weakness that can result from indicators is that traders tend to use them as a crutch. Beginners generally lack confidence in their chart reading skills. This can make you want to rely on the use of indicators to tell you what to do. This is a mistake. Remember indicators are secondary tools to confirm YOUR readings from price. Don’t let them become the star of the show. When an indicator produces a signal you should pay attention to it, add it into your analysis and then make your own decision. You want to be a strong technician that uses the tools on the chart to aid in your decision making. Relying solely on any indicator is a mistake.
Oscillators are a type of indicator that moves up and down in a banded range. Types of oscillators include the Stochastic and Relative Strength Index. Oscillators are used by traders to measure overbought and oversold conditions. In other words if an oscillator moves to the high point of its range it is a signal that the current move based on its time frame is probably going to slow down. Oscillators can be very helpful tools at identifying where and when price may be slowing down. Used in conjunction with pivot points, support and resistance an oscillator can be a powerful tool for a trader.
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