Indicators- basics & common mistakes

Basics & where to find:

Let’s do a brief explanation of the theory behind indicators before we dive into handpicking
indicators to go over specifically. As mentioned in other documents, TA shines if you combine
multiple elements, if multiple arrows point at the same direction, you can be more confident in a
successful outcome. Indicators are mathematical equations charted as lines which can show very
valuable information when used properly.

The indicators can all be found here (tradingview), you can just search them up in the search bar and
favorite your go-to indicators once you get the hang of them. When selected the indicator will either
show up in your chart, or underneath/above your chat like we can see on the picture with the RSI-
indicator activated.

What indicators should I use?

To answer this question it’s important to understand how different indicators work:

All indicators can be categorized in two categories:

-Leading indicator -> used to predict price movement / giving signals before price action happens
-Lagging indicator -> used to confirm price auction / giving signals during price action to (in)validate
trends

Then we also have different types of indicators: I’ll list a few behind every type, don’t have to know
them yet. They will all be explained individually

-Trend indicators (MACD / MA / EMA / Supertrend / parabolic SAR)

As the word suggests these are indicators best used while we are in an up/down trend (bear or bull).
They identify if we’re in a trend, determine the strength & show us entries / exits in such trends.

-Momentum indicators (RSI / Stochastic oscillator / CCI)

If there is any price movement and thus momentum, these indicators will test if that momentum is
still valid. They show potential reversals of price action and thus indicate how strong certain
momentum really is.

1
Investing with P.N. & Friends
-Volume indicators (OBV / Volume RSI / accumulation / distribution)
Confirm a trend or trading directions based on volume. In other words: the volume on certain
hypothesis’s is what gives us confidence in certain moves. Example: We trade a rising wedge (see
chart-patterns-part 1) but on the break volume is absent -> now we have much less confidence in
hitting targets than we would have had if volume was very high on break.

-Volatility indicators (BB / Volatility ratio / average true range)

Volatility means the variance in price, regardless of direction (up or down). These indicators are often
used to show a trading range. That gives us valuable information:
-buying and selling points within the range
-Price points where the market might change direction -> if we for instance break range.

Common mistakes & how to prevent them

-Using too many indicators (of one type):
We discussed these indicator types for a very important reason, namely: this will help u set-up a well-
rounded set of indicators in the future. You can see it like this: the indicators in the same type
basically have the same outcome but use different formulas. Use them to verify each other, not to
permanently plot on your screen and clutter it for no reason. Along the way you’ll develop
preference for the indicator you like most and use that one.

-Not using enough types (viewing in isolation)

Again we come back at the golden rule of TA: never look at something in isolation. Ideally you’d want
different type of indicators pointing towards the same thing.
Example: Price going up currently:
Our momentum indicator is showing us that the relative strength of the momentum is low, and thus
shows potential for reversal
At the same time our volatility indicator shows we’re reaching the top of our range which confirms
that it is likely that we see a potential reversal/retracement.

-Forcing indicators
Exactly the same as we discussed in chart-patterns-pt1 -> never force an indicator, always analyze it
in a neutral way and let the data speak for itself. If certain criteria of validity aren’t met, don’t risk
your capital when you’re in uncertainty.

If different types of indicators give mixed signals, we should always be wary.

From now on we’ll dive into the specific indicators and see how they work and how we should use
them

2
Investing with P.N. & Friends