Technical Indicator(s)

What is a Technical Indicator?

The purpose of a technical indicator is to give signals to traders: when to buy or when to sell an asset and this is done based on the price or volume. For future contracts, open interest rates are used to forecast market trends.
A technical indicator is included in the technical analysis and is used by those that use technical analysis as a way to determine what way the price will go.
Technical analysis will show whether a price is "overbought" or "oversold".

Technical indicators gather information by analyzing statistical trends, while fundamental analysts get the information from financial or economic data that includes earnings, revenue, or profit margins.

In general technical indicators/analyses are used by short-term investors as they need to know the "exact" pattern a price will have in the next minutes/hours. Price is not that important for long-term investors, but it doesn't mean they don't look at such information.
What is different for the 2 types of investors is the % the technical indicators have in the decision traders make.


Is a technical indicator useful or not?

This is a long debate that it's been going on for years with the result: some think it is useful and some don't think they are useful.


Although many studies were done on this matter, the balance hasn't tilted one way or another.

Many people who join the trading area tend to use them as they are simple to use.

The best suggestion in this kind of situation is to do it yourself. Try some indicators and see how they work for you/if they are useful or not.
However, don't base a decision only on an indicator or a sum of indicators.

How accurate are the technical indicators?

Although there are a lot of technical indicators out there, new ones are revealed to the public each year. The purpose is to get better and better results.

BUT, no matter how good the indicator might be, they can fail due to timing slacks, inconsistencies of information, or other reasons. This would give to the trader a false signal.


Therefore you can include technical indicators in your strategy but it's risky to trade based only on indicators.

The settings used by the trader can cause a lot of problems, with "time" setting causing different results as the time frame changes. The results might be good but not for the next hour or day OR they can be good for the next hour, but not for the next day.

This can cause a lot of variables and too much information offered to the trader, which usually leads to stress if not poor decisions.

Although this is not an exact top, most used technical indicators are: MACD, RSI, volume, Bollinger Bands, and SMA - Simple Moving Average.


Are these indicators better than the others?

An even better question would be: are the indicators popular due to their performance or other aspects like marketing, author popularity, or the visual aspect of the indicator?

Trader psychology is very important. For example, colors can influence traders to choose a chart or another, a pattern or another, or an indicator or another.

Another aspect would be that the more information a trader receives, the more complex the analysis is so it offers an advantage over the others. Attention: this is the perception and it might be true or not.

So the indicators might seem popular but this doesn't influence the performance it shows. An indicator offers data. Those data don't take into account the number of those who use it or not.
As previously suggested: is better to test the indicators yourself and see how good/useful they are for you.

However, too much information will make any decision hard to make, as the compilation of the data takes time. Since the market is very active and is changing rapidly, sometimes, the result you get after compiling the data was needed 1 minute ago. Now it has no value.


It doesn't have to be too much information from only one indicator. The chart can have multiple indicators that will create a picture hard to read. Understanding the chart will take extra time that adds to the need to compile the information.

Conclusions

Indicators are used to see "great" entry or exit points for an asset. So any trader should look for indicators that reveal useful information (for that trader).

At all times any trader should remember that the trader makes the decisions based on the information he has. This is different from a phrase like:
I found this indicator, seems to be good, I should do exactly what it says.

The success in trading is based on the traders' moves, moves that can be supplied with information gathered from different indicators.