Technical Indicators

This section introduces common trading indicators, with some of their standard and more novel applications in market analysis.

The Dow Theory, which laid the foundation for technical analysis, focuses on price. So it all started with price.

Along the way, trading indicators emerged. They were great tools and helped to clarify price action when used correctly. However, some traders went overboard at some point and overloaded their charts with dozens of indicators. As a result, they obscured the price action and missed the actual value of trading indicators.

In a comeback attempt, a group of price action purists formed. They claim that trading with price alone is the only way to trade. They reject all indicators. They want to trade with “naked charts” and “price action only”.

Rather than focusing on either price action or indicators, I advocate an open approach.

Price action is a tool, just like any other trading indicator. With any tool, the best way to learn it is to use it. Judge each tool on its own merits and recognize its drawbacks.

In a nutshell, don’t reject any tool because of its label.

Wilder’s array of indicators is a notable example of quality trading tools. His trading indicators have survived the test of time: ADX, RSI, Parabolic SAR, ATR. These are excellent indicators to start with.