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Using Indicators

Lesson 5 of 6
Duration 12:32
Level Beginner
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In this unit we’re going to talk about indicators. What are indicators? What can they do? Also, very importantly, what can they not do? We’re going to look at some common indicators, such as MACD, ADX, RSI, Stochastic and think about some ways that we might use them.

Contributed By: MarketLife

Study Notes:

Using Indicators

A time series derived from price data

  • (OHLC and sometimes V)
  • Might sometimes consider related markets or other data series

Vary in complexity

  • Difference between two closes is a simple indicator
  • More complex indicators could be thousands of lines of code

Historically, grew up with the rise in the easy availability of computing power

  • At one time, calculating a moving average was a chore!

A Common Misconception

Many technical analysis texts (and websites) say there are leading and lagging indicators.

This is not true! Technical indicators are all calculated from (past and current) price data, so they reflect the past.

(There are leading economic and fundamental indicators, but there are no leading technical indicators.)

There’s always a tradeoff: If we try to make an indicator more sensitive to recent data it will also provide more false signals.

There are no leading technical indicators.

Guidelines for Using Indicators

Understand the calculation and tool you are using.

  • Maybe should be able to do it by hand?
  • At least have that degree of understanding.
  • Names for indicators can be imprecise and misleading

Understand what it shows and what its quirks are.

If you combine indicators, be careful of overlap.

Categories of Indicators

Trend

  • Moving Averages
  • MACD
  • Parabolic SAR
  • ADX

Momentum Indicators

  • RSI
  • Stochastic
  • Williams %R
  • CCI

Volatility

  • ATR
  • Historical Volatility

Different Ways to Measure

Bounded (Oscillators)

  1. Chaikin Oscillator
  2. Williams %R
  3. Stochastic
  4. RSI

Unbounded

  • Momentum
  • Rate of Change
  • MACD

Using Line Crossings as a Signal

Using Indicator for OB/OS

Divergence

Much More Is Possible

Can combine indicators

Can take indicator signals as entries, exits, or input to other stages of your process.

Indicators may be adaptive or adapted to cycles in the market.

Indicators may be calculated on other indicators!

  • RSI of MACD, for instance

Understand what you’re trying to accomplish and what the indicator measures.

Summary

Indicators are calculated from OHLCV (and possibly OI) data.

They are usually visual presentations of processed price data.

Understand how the indicator you choose is calculated and what it measures.

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This material is from MarketLife and is being posted with its permission. The views expressed in this material are solely those of the author and/or MarketLife and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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