What Are Chart Indicators?

A chart indicator describes anything you add to your charts, which isn’t manually drawn. It automatically updates based on the price or volume of an asset and helps traders make predictions or put current price movements into context. Two common examples are moving averages and volume.

What Are Indicators?

Some popular examples you may be familiar with are moving averages, which are shown on the chart background, and volume which has its own box at the bottom of the chart.

These automatic analysis tools are called technical indicators, or just 'indicators' for short and they come in many different variations of all shapes, colours and purposes. Within your charting software, you’ll probably notice loads of them available to you, but in reality there are thousands of variations of indicators.

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These indicators are calculations based on the price or volume of the asset, they measure things like trends, volatility and momentum. The calculations result in a prediction of what to expect next, or just to put the current movements into some form of context.

There are broadly two categories of indicators: leading and lagging.

Leading Indicator

Leading means it makes some sort of prediction on what will happen next, and lagging indicators put the current price in context based on what has happened previously.

In general a leading indicator will come in the form of an oscillator, this usually appears under the price chart and has its own chart with a boundary above and below, this is then used to make predictions when combined with the price chart and the objects you have drawn on it.

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They can show things like when the price is getting too high or low in its current range, or when momentum is particularly strong or not. Each indicator has its own use and each one differs in what it's showing.

Lagging Indicator

A lagging indicator usually appears on the price chart itself, often in the form of a line chart which is shown top of the price candles. This helps to put the current price in context, so you can make decisions based on where the price is in relation to where the price has been in the past, or where it should be based on the calculations.

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A very popular lagging indicator is a moving average, which you may already be familiar with if you studied statistics at school. A moving average allows you to set a certain number of periods, for example you may choose to analyse the previous 200 candles. It then plots the average price of those 200 points on the current time frame. It will do this on every time point, so the effect is a smoothed line over your price chart.

The problem with most indicators is that they are based on calculations, which means they don't take into account certain market characteristics that you can see visually.

This means that they have a very limited amount of use. A lot of indicators also do something called repainting, which means on every time period, the calculation is run again and this changes how the indicator appears on the whole chart. That can completely change its position and change the analysis you just relied upon to open a trade.

This can often make the indicator look amazing in its predictive power in hindsight, when in reality, the live indicator wasn't very useful. We tend to use indicators as negative filters, they act as warning signs which causes us to reduce our position size, not increase it.