Beginner’s Guide: Post 17
Alright team, you’re getting pretty good at reading the raw language of the chart – the candlesticks, the S/R levels, the basic patterns. That visual analysis is absolutely key. But sometimes, you’ll see charts with extra lines or graphs plastered over or under the price. What are those?
Those are usually technical indicators. Think of them as little helpers that run calculations based on past price or volume data. They try to give you additional insights – maybe confirming the trend, measuring momentum, or highlighting when things might be getting overstretched.
Now, here’s the deal: indicators can be helpful, but they are not magic. They don’t predict the future any more than patterns do. They’re just another tool in the box, designed to assist your analysis, not replace it. Got it? Good. Let’s look at a couple of the most common and basic ones you’ll definitely come across.
So, What Exactly Is a Technical Indicator?
In a nutshell, it’s just a mathematical calculation based on historical price, volume, or sometimes both. The result of that calculation is then plotted visually on your chart, usually as a line or a graph.
What’s the point? Well, different indicators are designed to do different things:
- Some help smooth out choppy price action so you can see the underlying trend more clearly.
- Others try to measure the strength or momentum behind price moves.
- Some attempt to gauge volatility (how much the price is bouncing around).
- And some try to signal when the market might be “overbought” or “oversold,” hinting at potential reversals.
Quick tech note (don’t stress over this): Most indicators you’ll use initially are lagging indicators. This means they’re based on past data and are better at confirming what price has already started doing, rather than predicting the future perfectly. That’s okay! Confirmation is useful.
Example 1: Moving Averages (Your Trend Buddy)
This is probably the most common indicator you’ll see. A Moving Average (MA) does exactly what it sounds like: it calculates the average closing price over a specific number of past periods (candles) and plots it as a smooth line right on your price chart.
- Why? Because price can be jagged and messy day-to-day (or minute-to-minute!). The MA line smooths out that noise, making it easier to see the general direction of the trend.
- Types? You’ll mainly hear about:
- Simple Moving Average (SMA): Just the basic average price over ‘X’ number of periods (e.g., the last 50 candles).
- Exponential Moving Average (EMA): Similar, but it gives more weight to the most recent prices, making it react a little faster to changes. Beginners often start with SMAs, but EMAs are very popular too. Doesn’t matter hugely which you pick initially, just understand the concept.
- How to Use It (Simply):
- Trend Direction: Is the price generally staying above the MA line? That suggests an uptrend might be in play. Is the price mostly below the MA line? Could be a downtrend. Is the MA line itself sloping up or down? More clues!
- Dynamic Support/Resistance: Sometimes, price will pull back to a moving average line and bounce off it, treating it like a moving support or resistance level.
- Crossovers (Use with Caution!): You might see strategies where traders look for a faster MA (like a 10-period) crossing above a slower MA (like a 50-period) as a potential buy signal, or crossing below as a sell signal. This can work sometimes, but like all indicator signals, it can definitely give false alarms too!
Example 2: Volume Indicator (Our Old Friend)
Hey, we already talked about this one back in What is Liquidity and Volume? Why They Matter to Day Traders, remember? The Volume Indicator is usually shown as those vertical bars below your price chart, showing how many shares were traded during each candle’s period.
- Why it’s an ‘indicator’: While simple, it’s crucial! It indicates the level of activity and conviction behind price moves.
- Basic Interpretation:
- Seeing price make a big move up on high volume? That suggests strong buying interest and gives the move more credibility.
- Seeing price make a big move (up or down) on very low volume? That might make you suspicious. Maybe the move doesn’t have much power behind it and could fizzle out.
- Looking for breakouts through Support or Resistance? A breakout on high volume is generally much more convincing than one on weak volume.
Volume helps you gauge the oomph behind the price action.
Whoa There! A BIG Word of Caution on Indicators
Okay, this is important. It’s really easy, especially when you’re starting, to get mesmerized by indicators. You start adding one, then another, then another… until your chart looks like a plate of spaghetti exploded on it. This is affectionately known as “indicator soup,” and trust me, it leads to massive confusion and paralysis.
Here’s what you MUST remember about indicators:
- Price is King: Indicators are derived from price (and sometimes volume). The actual price action – the candles, the S/R levels, the patterns – is the most important information on your chart. Always start there.
- Confirmation, Not Creation: Indicators work best when they confirm what you’re already seeing in the price action. If price is bouncing off a support level AND your indicator gives a buy signal? Okay, that adds a bit of weight. But if the indicator says “buy” while the price is crashing through support? Be very skeptical of the indicator.
- They Give False Signals: All indicators lag to some extent, and all of them will give you bad signals sometimes. That’s just how they work. Don’t ever treat an indicator signal as a foolproof command to trade.
- Keep It Simple: Please, please, please start with just one or two simple indicators, like a moving average and volume. Learn how they behave in relation to price before even thinking about adding more complex stuff. Less is often more here.
Wrapping Up: Indicators as Helpers
So, technical indicators are those calculations based on price/volume that we plot on our charts. Things like Moving Averages can help smooth out price and show the trend, while the Volume Indicator tells us about the activity behind the moves.
The biggest takeaway? Use indicators as helpers, not crutches. Start simple – maybe just add one moving average (like a 20-period or 50-period EMA or SMA) to your chart. Watch how price interacts with it. See how volume behaves during big moves. But never rely on indicators alone. Always combine them with your understanding of price action, support/resistance, and maybe some basic patterns.
What’s Next? (This One’s REALLY Important!)
Okay, you’ve built up a solid foundation now! You know about reading charts, spotting levels, basic patterns, and even a couple of simple indicators. You might be getting eager to jump in…
HOLD ON!
Before you even dream about putting real money on the line, there is one concept that is vastly more important than any chart pattern or indicator. Seriously. It’s the difference between staying in the game long enough to learn, and blowing up your account quickly. We NEED to talk about how to protect your trading capital.
Let’s learn the absolute #1 rule for survival in day trading in The #1 Rule for Survival: Introduction to Risk Management in Day Trading
