An indicator is a statistical tool that may aid investors in performing technical analysis (TA) while calculating price movements based on the calculations of prices, trading volume, time intervals, and the volume of an asset.
There are a variety of indicators with different methods of estimation for traders to utilize. Individuals may even create their own indicators if they have the skills and knowledge regarding the tools required for the creation of indicators, such as the Pine Script tool, which can be found in TradingView, a renowned platform for graphical analysis in different assets.
Types of Indicators
Indicators may vary according to the different means of calculations, but generally, there are only a couple of indicators that are widely used as a standard means of technical analysis.
However, note that certain indicators are not meant to simultaneously operate alongside each other, for the reason that they may complicate the process of performing a technical analysis or have overlapping qualities.
Indicators may be categorized according to the following factors:
Time Interval Categorization
1. Lagging indicators are indicators that may allow an individual to view past information regarding an asset to aid in future investment decisions. However, although these indicators may have some latency in displaying its output, it is noticeably accurate. Therefore, it is suitable for confirming past performances to gather information regarding the current situation in order to perform an analysis.
An example that may represent lagging indicators is the Exponential Moving Average, also known as the EMA, where its indicators may come after the point of which a price changes its direction.
2. Leading indicators are indicators that signifies the change of trends for future price movements. These indicators may produce outputs at a fast rate, but they may result in errors as well. These indicators are suitable for estimating future trends, price movements, and price divergence that may occur.
An example of leading indicators is when a Moving Average Convergence Divergence (MACD) detects a divergence, it may signify the change of direction for a price movement in the future of an asset.
Some indicators may have both of these characteristics mentioned above, which are lagging indicators and leading indicators. If an individual uses MACD to view the moving average, this form of utilization refers to lagging indicators. However, if an individual chooses to view the divergence on MACD, it would refer to leading indicators.
An individual may use both indicators simultaneously to best optimize the performance of their analysis.
Consists of 4 different types of indicators, which are as follows.
1. Trend Indicator is an indicator that generalizes the price movements as trends towards the upside, sideways and downwards. Upside trends are often known as bullish trends, while downwards trends are known as bearish trends.
Examples of trend indicators are the Moving Average (MA), Bollinger Bands (BB), and Parabolic SAR.
2. Volume Indicator refers to an indicator that analyzes the volume or the amount of trading orders, which has great importance in technical analysis, for the reason that it aids in the confirmation of a price movement. Additionally, it is able to indicate which asset has more attention from traders, which also assists traders in making their decision on which asset would have the potential to be more profitable as well.
Examples of volume indicators are the Volumes (Vol) and On Balance Volume (OBV)
3. Momentum Indicator is an indicator that analyzes the momentum and acceleration of a price movement, which may even illustrate its strength towards a certain direction. A momentum indicator may suggest an upcoming falling knife, or even a strong bullish candle, therefore investors and traders may utilize this indicator to assist them in making investment decisions.
Examples of momentum indicators are the Commodity Channel Index (CCI), Relative Strength Index (RSI), and Stochastic
4. Volatility Indicator is an indicator that analyzes the volatility of an asset’s price. A low volatility level indicates that an asset’s price movement is miniscule, whereas a high volatility level indicates that its price movement may constantly change significantly throughout a certain period.
Examples of volatility indicators include the Average True Range (ATR) and Standard Deviation (SD)