We’ve already covered the basics of technical analysis—how to read candlesticks, spot patterns, and use support and resistance to find trading opportunities. But what about the patterns we can’t see at first glance? That’s where indicators come in.
Indicators help us make sense of price action by highlighting relationships that aren’t always obvious. They can signal potential reversals, confirm trends, and provide insight into market momentum. There are three main types:
• Leading indicators try to predict price movements before they happen.
• Lagging indicators confirm trends after they’ve started.
• Coincident indicators move in real-time with price, offering instant confirmation.
How Are Indicators Calculated?
Every indicator is built using price data—open, high, low, and close. In theory, an experienced trader could spot these relationships without indicators, but it’s incredibly difficult. That’s why we use them: they simplify complex data into actionable insights.
How do leading indicators predict price movements?
Leading indicators attempt to forecast where price is headed. Popular ones include the Relative Strength Index (RSI), Stochastic Oscillator, and MACD (Moving Average Convergence Divergence).
One of my favourites? The Stochastic Oscillator—a great tool for spotting momentum shifts and overbought/oversold conditions. When the stochastic dips below 20 and flattens out, it signals weak downside momentum and a potential reversal.
Even more powerful is divergence—when price makes a lower low, but the stochastic forms a higher low. This signals that the downward momentum is fading, and a reversal could be on the horizon. Early in my trading journey, I relied heavily on the stochastic to spot divergence. Now, I can often see it forming, but I still use the indicator to confirm my bias.
How do lagging indicators confirm a trend?
Lagging indicators don’t predict trends—they confirm them. The most well-known example? Moving Averages.
A moving average smooths out price fluctuations by averaging past closing prices. If it’s sloping up, the trend is up; if it’s sloping down, the trend is down. Many traders use combinations of moving averages (like the 50-day and 200-day) to confirm trend direction.
The downside? Moving averages react to price after the trend has already shifted. This can mean entering a trade later than ideal, but the trade-off is higher accuracy. When combined with leading indicators, they become a powerful tool for increasing probability.
What do coincident indicators reveal?
Coincident indicators move alongside price, helping traders gauge market participation. The two big ones? Volume and Price Action.
• Rising price + rising volume = strong uptrend.
• Rising volume + price stuck between two levels = indecision.
• Falling volume near resistance = buyers losing steam.
Since these indicators operate in real time, they can be trickier to use on their own. Many traders rely more on leading and lagging indicators for clearer signals.
How can we combine indicators for better trades?
Let’s say we’re looking to buy gold and need confirmation before jumping in.
1. We apply a 14-period RSI and a 7-day and 21-day moving average to our chart.
2. The RSI drops below 30, signalling oversold conditions—we start watching for a reversal.
3. Price reaches a key support level and prints a strong bullish candle. That’s our entry signal.
4. To confirm, we monitor the moving averages—when the 7-day crosses above the 21-day, we have trend confirmation, giving us confidence to stay in the trade.
This mix of leading (RSI), lagging (moving averages), and coincident (price action) indicators stacks the odds in our favour.
What Other Types of Indicators Are There?
Indicators aren’t just technical. Economic indicators—like GDP growth, employment data, and inflation—help shape market sentiment. A trader who understands both technical and economic indicators has a serious edge.
That said, don’t overcomplicate your strategy. You don’t need 10 different indicators all flashing buy signals at the same time—it won’t happen.
Instead, focus on two or three that work well together and build a system around them.
A common rookie mistake? Searching for a “holy grail” indicator that guarantees success. It doesn’t exist. Indicators simply help us recognize patterns. At the end of the day, they’re just mathematical formulas—it’s up to you to interpret and apply them effectively.
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