Lesson 10: Introduction to Technical Indicators
Part of Module 3: Technical Analysis - The Art of Reading Charts
Introduction: The Trader's Dashboard
A technical indicator is a mathematical calculation based on a currency pair's price or volume. The result is plotted as a line or a graph on your chart to provide extra information.
Analogy: A Car's Dashboard. Think of indicators like the dashboard in your car. The speedometer and fuel gauge give you useful information, but they don't drive the car for you. The price chart is the road ahead. You must always watch the road (price action and market structure) first, and only glance at your dashboard (indicators) for confirmation.
The Two Main Types of Indicators
While there are thousands of indicators, they mostly fall into two categories.
1. Trend-Following Indicators
As the name suggests, these indicators are designed to help you identify and confirm the direction of the market's trend. The most common type is the Moving Average (MA).
What it does: A Moving Average takes the average closing price over a set number of periods (e.g., the last 50 hours) and plots it as a smooth line on your chart.
How traders use it: A simple rule of thumb is that when the price is consistently trading above the moving average, the market is considered to be in an uptrend. When the price is below it, the market is in a downtrend.
2. Oscillators
Oscillators are indicators that move back and forth between two extremes, and they are designed to measure momentum. The most popular oscillator is the Relative Strength Index (RSI).
What it does: The RSI is displayed in a separate window below your chart and measures momentum on a scale of 0 to 100.
How traders use it: A reading above 70 is considered "overbought", suggesting that buying momentum is high and the market might be due for a pullback. A reading below 30 is considered "oversold", suggesting that selling momentum is high and the market might be due for a bounce.
The Power of "Confluence"
The real power of indicators comes when you combine them with your knowledge of market structure. This is called confluence—when multiple, independent signals all point to the same conclusion.
Vivid Example: Imagine the price of EUR/USD comes down to a strong support level (from Lesson 9). At the same time, you look at your RSI and see that it is in the "oversold" zone. This confluence of two different signals gives you a much higher-probability reason to look for a buying opportunity.
The #1 Trap: Analysis Paralysis
The biggest mistake beginners make is adding too many indicators to their chart. A chart with 5 or 10 different indicators will give you conflicting signals and lead to confusion, not clarity. This is called "analysis paralysis." It's best to pick one or two and learn them well.