The prime task of a trader is to make decisions. Every trade the traders take is ultimately a decision to buy or sell. But to arrive at this decision, they have to analyze a host of things. The trader needs to make a well-informed decision based on the charts, take into consideration their position size, and risk management. To take such important financial decisions, only analyzing price action is not enough. The price action needs to have context to them. This context is given by Indicators. In this newsletter we discuss about the various types of Indicators available at the trader’s disposal. We will also discuss the indicators I use in my trade decisions.

The Indicator Family

Indicators can be broadly classified into 4 types based on the purpose they serve

Let us understand the indicator types.

Trend Indicators are overlay indicators. Overlay indicators plot on the price charts. These indicators inform the trader about the trend on the chart. This is done by observing the position of the price relative to the indicator.

If price is trading above the indicator line, then the trend is considered to be bullish.

If price is trading below the indicator line, then the trend is considered to be bearish.

The various trend indicators are Moving Average, Super trend, and MAST indicator.

Momentum Indicators are underlay indicators. Underlay indicators plot below the price chart separately. Momentum indicators tell the trader about the rate of change of price. If the momentum is high, the change in price is fast. If the momentum is low, the change in price is slow. Momentum indicators help the trader understand if the price is changing fast enough.

RSI and ADX are the widely used momentum indicators.

Volatility Indicators are underlay indicators as well. Volatility refers to the tendency of the price to change rapidly and unpredictably. These indicators show how much the price tends to fluctuate in a particular period. Volatility indicator help the trader estimate the time it would take for a stock to reach the targets. The volatility indicator also helps in placing the stop loss at the right levels so that the price doesn’t trigger the stop loss at expected levels.

Volume Indicators are underlay indicators. These indicators show how much transaction took place in an instrument. This is usually used by breakout traders to confirm whether the breakout was backed by genuine demand or a few orders that were meant to trap the participants. If volume is high, it means the stock is in high demand or high supply (based on the direction of breakout). If the volume is low, it means the price isn’t seeing much demand or supply.

The indicators a trade must use

There has been a debate in the trading community on whether to use only Price action or only Indicators for analysis. In my opinion, it is better to use whatever works for you as a trader and your trading style. Indicators provide context to the chart and help the trader make well-informed decisions. If traders want to use indicators for trading, they should use a minimum of 3 types of indicators. One from Trend family, One from Momentum family, and One form Volatility

Moving Average, RSI, and ATR together can make for a great set of indicators for analysis. I have shown how to use these 3 indicators in my YouTube video on indicators. Do watch it to understand how I use them for my analysis.