Indicators can be categorized into two main types:
Trending indicators help identify if the market is experiencing a trend and the direction of that trend.
One of the most commonly used trending indicators is the moving average. Using a moving average as an example, You can identify the trend by looking at the slope of the moving average and whether the price is above or below it.
The other type of indicator is the ranging indicator.
Ranging indicators are also known as oscillating indicators because they oscillate between an upper level and a lower level.
When the upper level is reached, It indicates that the asset is overbought and that the price may move back down into the range.
When the upper level is reached, It indicates that the asset is overbought and that the price may move back down into the range. This example uses the MACD indicator which is an oscillator that shows overbought and oversold conditions in a ranging market.
If an indicator is lagging, it means that it provide information about the price action after it has happened.
Trading indicators are usually classed as lagging indicators because they will confirm whether the price is trending after it has started.
A leading indicator will generally indicate signals ahead of time.
For this reason, ranging indicators or so-called oscillators will generally fall into this category because they indicate when the price is due for a reversal.
Because the market conditions change, Some indicators are more useful than others and can be combined depending on the market environment.
The market could be ranging for a while but the sentiment can change and the market could start trending. You can display different indicators so you can be ready to trade in any market condition, then you can use one or the other to determine when to enter and exit the market.
It is when the market sentiment changes and the market starts trending that the stochastic oscillator becomes less useful. And, then, The moving average provides more reliable information to the trader.
Firstly, the moving average will help you to confirm the direction of the market.
The price moves away from the moving average and the moving average begins to point down. The price moves below the moving average and confirms the market is now in a downtrend.
You can then use the moving average to help make trading decisions.
Note, though, that there is less restriction when placing more than one indicator on the chart. You can, for instance, use multiple moving averages at the same time. It only becomes restrictive when the amount of indicators used starts obscuring price action.
There are other indicators that can be used for different market conditions. You will learn how to use them in the next chapters.