What does an indicator actually do?
Every technical indicator is built from the same raw material: closing, high and low prices, and sometimes volume. The formula summarizes those numbers into something easier to read. So an indicator holds no new information that is not already on the chart; it shows part of it more clearly. And every indicator is calculated over a period, such as the last 14 sessions, so it always runs a step behind the price itself.
Four families, four questions
The easiest way to organize indicators is to ask which question each one answers. Most well-known indicators fall into one of four families:
Some indicators sit on the border between two families, like MACD, which is built from trend averages but is also read as momentum. The grouping is there to organize your thinking; it is not a law.
Why three indicators can be one fact
It is more useful to ask different questions: what is the overall trend, is the recent move strong, how much is the price swinging, is there volume behind it? One indicator per question gives you a wider picture than five indicators answering the same one.
How to choose
- Start with your questionDo you want the trend, the strength of the move, or the size of the swings?
- Pick one indicator from that familyLearn it properly: how it is calculated, its usual settings, and when it misleads.
- Add another family if you need toA trend indicator plus a volume indicator, say, rather than two trend indicators.
- Remember that settings change the resultA short period is faster and noisier; a long one is calmer and slower.
Try two indicators from two families
Open any stock on FoudaLens, add one trend indicator and one momentum indicator to the chart, and see what each one describes.
Check yourself
1. RSI and Stochastic RSI are both in their high zones. What does that mean?
2. You want to know how much a stock swings. Which family do you look at?
Summary
- An indicator is a formula on past prices and volume; it describes one aspect and lags the price.
- The four families are trend, momentum, volatility and volume, each answering one question.
- One indicator per question is clearer than many that repeat the same fact.