Indicators That Matter
Moving averages, RSI and MACD in plain English: what each one tells you, lagging vs leading indicators, and why using fewer is usually better.
Course outline
A car dashboard is full of useful gauges, but nobody drives by staring at it. You look through the windscreen and glance down now and then. On a trading chart, price is the windscreen and indicators are the dashboard. They help, but they should never replace looking at the road.
What is an indicator?
An indicator is a mathematical formula applied to price (and sometimes volume) and drawn on your chart as a line or histogram.
The honest truth: every price indicator is made from the same price data you can already see. It reorganises that data so things like trend or momentum are easier to spot, but it adds nothing new.
Lagging vs leading
- Lagging indicators follow price. They confirm a move after it has started, which makes them steadier but late. Moving averages and MACD are lagging.
- Leading indicators try to hint at a turn before it happens, usually by measuring momentum. RSI is often described this way. They react sooner, but they also give more false alarms.
No indicator predicts the future. Knowing each one's weakness is half the skill.
Moving averages
A moving average (MA) smooths out price by averaging the closing prices over a set number of periods. Each new candle, the oldest price drops off and the newest is added, so the average "moves."
- A simple moving average (SMA) gives every period equal weight.
- An exponential moving average (EMA) gives more weight to recent prices, so it reacts faster.
Worked example: a 5-day SMA
Closing prices for five days: $20, $21, $22, $21, $23.
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