# What is an indicator?



## It's Snake Pliskin (29 December 2006)

I come across many different opinions and conjecture regarding indicators. I feel most confuse the word "indicators" with some basic indicators such as MACD, Stochs etc.
Stevo said price is an indicator.

So what is an indicator from the forum members here.


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## theasxgorilla (29 December 2006)

It's a derivative of either price or volume (or both) that allows one to try to interpret what price and/or volume have been doing and hopefully, therefore, what they will do projecting into the as yet unrevealed right side of the chart.


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## theasxgorilla (29 December 2006)

I suppose that price is not an indicator in and of itself, except in that it defines (indicates) what the market traded price was at a point in time.  

However, when represented as a bar or a candle (or whatever) does that "summary" of the price action become an "indicator", since it helps us to interpret what happened in the market during the period that it summarises?

I sense a long philosophical discussion coming on


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## Joe Blow (29 December 2006)

Have moved this thread to the 'Beginners Lounge'.


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## Bobby (29 December 2006)

An indicator is just that, an indication of a probable outcome within a time component.
Some use indicators as a sybaritic within there own makeup.

If you think these tools are going to make you money, you may be disappointed.

Bob.


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## It's Snake Pliskin (30 December 2006)

Bobby said:
			
		

> An indicator is just that, an indication of a probable outcome within a time component.
> Some use indicators as a sybaritic within there own makeup.
> 
> If you think these tools are going to make you money, you may be disappointed.
> ...




Bobby,

I had to look that one up. An "epicurean banquet."


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## It's Snake Pliskin (30 December 2006)

theasxgorilla said:
			
		

> I suppose that price is not an indicator in and of itself, except in that it defines (indicates) what the market traded price was at a point in time.
> 
> However, when represented as a bar or a candle (or whatever) does that "summary" of the price action become an "indicator", since it helps us to interpret what happened in the market during the period that it summarises?
> 
> I sense a long philosophical discussion coming on




So if price moves up or down does it *indicate* to buy or sell?


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## barney (30 December 2006)

It's Snake Pliskin said:
			
		

> So if price moves up or down does it *indicate* to buy or sell?





Howdy Snake,  Its late here so I'll get a bit poetic .............. whether price up or price down represents a buy or sell is conditioned by our perception of what we think the masses are going to do, relative to what time frame we are thinking in.  

Price action is simply the vehicle we hop into when we perceive the two way street/road is about to turn into a one way street, and then hopefully an expressway... then we exit at the toll gates and turn into a toll collector, taking payment from all those going in the wrong direction ............. Hows that for "deep" ........... Cheers, Barney ........... I gotta get some sleep; I'm starting to think "weird"!!


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## Bobby (30 December 2006)

It's Snake Pliskin said:
			
		

> An "epicurean banquet."




Yep Snake thats another way to examine it !

Place your bets  . 

Take care Barney   

Cheers Bob.


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## wayneL (30 December 2006)

I guess we should look to the motoring version of indicator.

When it starts flickering it *may mean the car is going to turn. But I am sure we have all seen instances where this is simply not the case, cars may even turn without indication... particularly prevelant around schools at certain times of day.... or anytime where a female happens to be driving**

I'll get my hat, quick!!!!!  

** Just a joke ladies


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## Bobby (30 December 2006)

wayneL said:
			
		

> I guess we should look to the motoring version of indicator.
> 
> When it starts flickering it *may mean the car is going to turn. But I am sure we have all seen instances where this is simply not the case, cars may even turn without indication... particularly prevelant around schools at certain times of day.... or anytime where a female happens to be driving**
> 
> ...



Wayne its ok ! your stating fact, the female is  not as clever  as the male


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## barney (30 December 2006)

Bobby said:
			
		

> Wayne its ok ! your stating fact, the female is  not as clever  as the male






    (One for Wayne and one for Bob) You are both brave men!! ........... At least you have the rest of the night to come up with some reasonable excuses should any of our "lady drivers" find this thread in the morning ................. ................. PS Ladies have nicer "indicators" than men regardless of their driving skills ............ Good night lads.


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## Bobby (30 December 2006)

Yes Barney - when they see this I do exspect a female reaction


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## wayneL (30 December 2006)

barney said:
			
		

> (One for Wayne and one for Bob) You are both brave men!! ........... At least you have the rest of the night to come up with some reasonable excuses should any of our "lady drivers" find this thread in the morning ................. ................. PS Ladies have nicer "indicators" than men regardless of their driving skills ............ Good night lads.




I am prepared:


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## Bobby (30 December 2006)

Gee check the **** protection, that will turn em on I hope !

If not I'll cop most


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## theasxgorilla (30 December 2006)

It's Snake Pliskin said:
			
		

> So if price moves up or down does it *indicate* to buy or sell?




Well, price itself is a static measure, but it does "indicate" that something has happened ie. an order of this amount was filled at this price.

In order to know whether price has gone up, or down, we need to know what price the previous order was at.  We then have two pieces of information and the difference can "indicate" what has happened.  Whether you buy or sell or not depends on how your interpret _the tape_ 

This is largely philosophical though.  I think that most people use "indicators" synonymously with "technical indicators"  and probably expect that when someone says "indicator" that they're refering to something at least as complex as a moving average.


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## stevo (30 December 2006)

theasxgorilla said:
			
		

> In order to know whether price has gone up, or down, we need to know what price the previous order was at.  We then have two pieces of information and the difference can "indicate" what has happened.  Whether you buy or sell or not depends on how your interpret _the tape_



Spot on.


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## wayneL (30 December 2006)

wayneL said:
			
		

> I am prepared:




I'm sorry ladies!

Can I take off this suit of armour now? It's hot in here!


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## It's Snake Pliskin (30 December 2006)

What was supposed to be discussion on something has........


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## wayneL (30 December 2006)

It's Snake Pliskin said:
			
		

> What was supposed to be discussion on something has........




....turned into a joust?

Don't let the more sanguine amongst us distract you.  

Carry on, carry on........


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## judge (4 January 2007)

theasxgorilla said:
			
		

> It's a derivative of either price or volume (or both) that allows one to try to interpret what price and/or volume have been doing and hopefully, therefore, what they will do projecting into the as yet unrevealed right side of the chart.






> I suppose that price is not an indicator in and of itself, except in that it defines (indicates) what the market traded price was at a point in time.
> 
> However, when represented as a bar or a candle (or whatever) does that "summary" of the price action become an "indicator", since it helps us to interpret what happened in the market during the period that it summarises?




Spot on summaries imo 

The only additonal suggestion I would make is to ensure users of indicators understand the maths that drive the indicators so as to fully understand how they work and where they work best.

Using indicators blindly without understanding how they work is frought with danger.

Personally, I like using the MACD/MACD-H and Stochastic indicators as my primary indicators along with volume.

I like the Stochastic because it is a 'momentum' indicator and best suited to non-trending sideways moving stocks.  I like the MACD because it is a 'trend following' indicator and is best suited to trending stocks and much less suited to non-trending stocks.

One simple example of interpreting indicators incorrectly is many traders interpreting a sell signal on the stochastic as soon as it reaches the 'overbought line' from below it, typically a value of 75-80, when in reality the uptrend might still be intact and strong.  Quite often the stochastic will stay above the overbought line while the uptrend continues.

*The stochastic actually gives a sell signal when both the fast and slow stochastics cross below the 'over bought line' from above it.*

Understanding the maths driving the stochastic will help the user understand what is happening when the true sell signal is given and why the stochastic simply reaching the overbought line from below is not a true sell signal.


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## stevo (4 January 2007)

> I like the Stochastic because it is a 'momentum' indicator and best suited to non-trending sideways moving stocks.



This is the standard approach for stochastic. If you look at the stochastic formula this indicator is showing where the close price is in relation to the recent high and low price. so if the price is closer to the highs then the stochastic value is above 50. It is possible to plot the 50% level on the price chart itself - as well as the 20/80 levels.

It is possible to use stochastic as a trend indicator knowing this information. 

The chart below shows the 50% stochastic level (my adaptation) plotted on a monthly chart, as well as the 0% and 100% levels. The price can basically be used as the indicator.




The code for this is on my blog.


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## It's Snake Pliskin (7 January 2007)

stevo said:
			
		

> This is the standard approach for stochastic. If you look at the stochastic formula this indicator is showing where the close price is in relation to the recent high and low price. so if the price is closer to the highs then the stochastic value is above 50. It is possible to plot the 50% level on the price chart itself - as well as the 20/80 levels.
> 
> It is possible to use stochastic as a trend indicator knowing this information.
> 
> ...




Nice work Stevo. Some people suggest using it as it is as a trend indicator, which I don't find useful - I just can't read it. Your way is very smart indeed. The price becomes the indicator.
Snake


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