Beginner’s Guide: Post 17
Okay, you’re building a solid foundation. You can read the raw language of the chart through candlesticks and identify key formations using chart patterns. But what about all those extra squiggly lines you see plastered all over the charts of other traders?
Those are trading indicators.
And let’s be honest, when you first see them, they can be incredibly intimidating. That’s why we’re going to keep this lesson simple. Forget the complex formulas and fancy jargon for now. Let’s use an analogy our team loves: think of your chart as a car. The price action—the candlesticks and patterns—is your view out the front windshield. It’s the most important thing you should be looking at to see where you’re going. Trading indicators are just the gauges on your dashboard. Your speedometer, your tachometer, your oil pressure… they provide useful, secondary information. But you don’t drive by staring at your gauges, right? You glance at them to confirm what you’re seeing through the windshield. That’s exactly how you should treat trading indicators.
Learning Objective: This guide will demystify technical indicators, teach you the single most important rule for using them, and give you a simple, two-indicator toolkit to start with.
What You’ll Learn:
- The “Golden Rule” for using all trading indicators.
- The two essential indicators every beginner should learn first: Moving Averages and Volume.
- How to use a Moving Average to identify trend direction and dynamic support/resistance.
- How to use the Volume indicator to confirm the strength of a price move.
Estimated Time to Complete: 20 minutes
Prerequisites: Simple Chart Patterns Every Beginner Should Recognize
The Golden Rule: Price Action is King
Before we look at a single indicator, you must internalize this rule. It is the single most important concept in this entire lesson, and it will save you from a world of pain.
Indicators Are Helpers, Not Heroes
Trading indicators are derivatives of price. That’s a fancy way of saying they are just mathematical calculations based on past price and/or volume data. They don’t have any magical predictive power. They are simply showing you what price has already done, but displayed in a different, often simplified, way. The raw price action on your chart is the purest information you have. The indicator is just an interpretation of that information.
The Critical Concept: Confirmation, Not Creation
Here’s the deal: indicators should only ever be used for confirmation, not for the creation of a trade idea.
What does that mean? It means you should first find a potential trade setup based on pure price action. Maybe it’s a bounce off a key support level, or a breakout from a bull flag pattern. Then, and only then, do you glance at your indicators to see if they support, or confirm, your trade idea. They should never be the primary reason you enter a trade.
The “Beginner’s Toolkit”: One for Trend, One for Confirmation
When beginners discover indicators, they often fall into a dangerous trap. They start adding one… then another… then another, hoping to find the “perfect” combination that never loses. The result is a chart that looks like a plate of spaghetti exploded on it.
The Dangers of “Indicator Overload”
This is what traders call “indicator overload” or “analysis paralysis.” With five different indicators giving you three different signals, you become confused, hesitant, and unable to make a clear decision. It’s a classic rookie mistake. A messy chart leads to a confused mind and, ultimately, poor trading decisions.
Our Team’s Recommendation: The KISS Toolkit (Keep It Simple, Stupid)
So, how do you avoid this? You start with a ruthlessly simple toolkit. Our team recommends that every single beginner start with only two indicators. That’s it.
- One Trend Indicator: A Moving Average Indicator
- One Confirmation Indicator: The Volume Indicator
Master how these two basic tools interact with price action before you even think about adding anything else.
Indicator #1: The Moving Average (Your Trend Buddy)
This is one of the most widely used simple technical indicators on the planet, and for good reason.
What is a Moving Average?
A Moving Average (MA) does exactly what its name suggests: it calculates the average price of a stock over a specific number of past periods (e.g., the last 50 candles) and plots it as a single, smooth line on your chart. Its primary job is to smooth out the day-to-day “noise” of choppy price action, making it much easier to see the underlying trend.
Simple (SMA) vs. Exponential (EMA): What’s the Difference?
You’ll see two main types:
- Simple Moving Average (SMA): A straightforward average of the past ‘X’ prices.
- Exponential Moving Average (EMA): Similar, but it gives more weight to the most recent prices, making it react a little faster to new information.
Real talk: for a beginner, the difference is not critical. The EMA is a bit quicker, the SMA is a bit smoother. Our advice? Just pick one (the EMA is very popular with traders) and be consistent. Don’t get bogged down in the debate.
How Our Team Uses Moving Averages
We keep it simple. We use MAs for two primary jobs:
- Primary Use #1: Identifying Trend Direction: Is the price generally trading above the moving average, and is the MA line itself sloping upwards? That’s a good sign you’re in an uptrend. Is the price below a downward-sloping MA? Likely a downtrend.
- Primary Use #2: Spotting Dynamic Support and Resistance: In a strong trend, the moving average will often act as a moving, or “dynamic,” level of support (in an uptrend) or resistance (in a downtrend). Price will often pull back to the MA and “bounce” off it.
Real-World Example: Microsoft (MSFT) Riding Its 50-Day SMA
Look at the daily chart of Microsoft (MSFT) from May to July 2025. The stock was in a clear, healthy uptrend. We’ve plotted the 50-day Simple Moving Average on the chart. Notice how in late May, and again in early July, the price pulled back to the 50 SMA, found buyers right at that level, and then bounced to continue its move higher. This is a perfect example of the MA acting as dynamic support.
For traders who want to go deeper on this specific topic, we have a complete guide on trend following with moving averages.
Indicator #2: The Volume Indicator (Your Truth Detector)
We’ve touched on this before, but it’s so important that it’s the second and final piece of your beginner’s toolkit.
What is the Volume Indicator?
The volume indicator is usually displayed as a bar graph below your price chart. Each bar simply shows how many shares were traded during that corresponding price candle’s period. It’s a direct measure of market activity and participation.
How Our Team Uses Volume for Confirmation
Volume tells you about the conviction behind a price move. It’s our “truth detector.”
- Use Case #1: Confirming Breakouts: This is huge. A breakout from a chart pattern or a resistance level on high, surging volume is far more likely to be legitimate than one that occurs on weak, anemic volume. High volume is the fuel for a powerful move.
- Use Case #2: Gauging the “Health” of a Trend: In a healthy uptrend, you generally want to see volume increase as the price rises and decrease as the price pulls back. It shows enthusiasm on the up moves and a lack of selling pressure on the dips.
Real-World Example: Volume Confirming the AMD Breakout
Let’s revisit the AMD bull flag pattern from our last lesson. The breakout on August 8, 2025, was a classic price action signal. But how could we trust it? We look down at the volume indicator. During the quiet consolidation of the “flag,” the daily volume was low, around 30 million shares. But on the breakout candle, volume exploded to over 75 million shares—more than double the recent average! That massive spike in participation told us that big players were behind this move, giving us much higher confidence that it was the real deal.
To refresh your memory on the basics, check out our guide on liquidity and volume.
What About Other Common Indicators? (A Quick Peek for Later)
As you continue your journey, you will hear about many other trading indicators. We want you to know what they are, but we strongly advise you to master the MA and Volume first.
- Relative Strength Index (RSI): This is a momentum oscillator. It measures the speed and change of price movements on a scale of 0 to 100. Traders use it to gauge “overbought” (typically above 70) or “oversold” (typically below 30) conditions.
- MACD (Moving Average Convergence Divergence): This is a more complex trend-following momentum indicator that uses two moving averages to identify changes in the direction and strength of a trend.
The Biggest Mistakes Beginners Make With Trading Indicators
Avoiding these pitfalls is half the battle.
- Using Them as Blind Buy/Sell Signals: Seeing a moving average crossover or an RSI dip into “oversold” territory and blindly hitting the buy button without any confirming price action is a recipe for disaster.
- Piling on Too Many Indicators (“Indicator Soup”): As we showed earlier, more is not better. A cluttered chart leads to a cluttered mind.
- Searching for a “Holy Grail” Indicator: It does not exist. Every indicator has flaws and will give false signals. Success comes from a holistic trading process, not a magic indicator.
Summary & Key Takeaways
- Price Action is King: Trading indicators are always secondary to what the price itself is doing. Use them for confirmation only.
- Keep It Simple: As a beginner, start with just two indicators: a Moving Average for trend and the Volume indicator for confirmation.
- Moving Averages help smooth price and identify the trend’s direction. They can also act as dynamic support or resistance.
- Volume is your “truth detector,” confirming the strength and conviction behind a price move.
- Avoid the common mistakes of relying on indicators for signals or piling too many onto your chart. Your goal is a clean chart and a clear mind.
Frequently Asked Questions (FAQ)
What are the most popular trading indicators for beginners?
Quick Answer: The most popular and best trading indicators for beginners are Moving Averages (SMA or EMA), the Volume indicator, and the Relative Strength Index (RSI).
Our team advises starting with just a Moving Average and Volume. They are simple to understand, provide clear information about trend and conviction, and work well with the price action principles you’re already learning. Mastering these two is more valuable than knowing a little about ten different ones.
Key Takeaway: Start with a Moving Average for trend and Volume for confirmation; they provide the most utility for a beginner.
How many indicators should a beginner use to avoid confusion?
Quick Answer: A beginner should use no more than two or three indicators at a time to avoid “indicator overload” and confusion. The goal is to have a clean, readable chart.
We recommend starting with just a Moving Average and the Volume indicator. This combination gives you a view of the trend and the strength behind the moves without cluttering your decision-making process.
Key Takeaway: Less is more. Start with two indicators and only add another if it provides a unique piece of information you truly need.
What is the best indicator to identify the direction of a trend?
Quick Answer: The Moving Average (either SMA or EMA) is widely considered the simplest and one of the best indicators for identifying trend direction.
When the price is consistently trading above a rising moving average, the trend is considered up. When the price is consistently below a falling moving average, the trend is down. The slope of the MA line itself provides a clear, visual cue of the trend’s direction and momentum.
Key Takeaway: A simple Moving Average is an excellent visual tool for quickly assessing the primary trend direction.
How do I add a trading indicator to my chart?
Quick Answer: In most trading platforms, there is an “Indicators” or “Studies” button that opens a library of available tools you can add to your chart with one click.
Most modern platforms make this very simple. For example, in TradingView, you just click the ‘Indicators’ button at the top of your chart, search for the one you want (e.g., ‘Moving Average Exponential’), and click on it to add it to your chart. You can then adjust the settings, like the length or color.
Key Takeaway: Adding indicators is a simple process in any modern charting platform, usually accessible via an “Indicators” menu.
What is the biggest mistake new traders make when using indicators?
Quick Answer: The biggest mistake is using an indicator’s signal (like a crossover) as a blind command to buy or sell, without considering the overall price action context.
New traders often look for a “magic” signal that tells them exactly when to trade. They might see a MACD crossover and immediately buy, even if the stock is trading directly into a major resistance level. Professional traders use indicators to confirm a trade they’ve already identified with price action, not as the sole reason for the trade.
Key Takeaway: Never trade an indicator signal in a vacuum; always confirm it with price action, support/resistance, and overall market context.
Next Step: Protecting Your Capital
You now have the absolute essentials of technical analysis under your belt—price action, patterns, and basic trading indicators. This is the ‘offense.’ Before you can even think about playing offense, you MUST master defense. The next lesson is the most important one in this entire series. Let’s talk about survival.
Ready to learn the #1 rule? Let’s go: Chapter 18: The #1 Rule for Survival: Introduction to Risk Management in Day Trading
