What is an indicator?

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.

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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?

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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.

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

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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.

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.

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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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