What is an indicator? | FBS Glossary

What are indicators?

Indicators are statistical tools that analyze current market conditions, identify chart patterns and give predictions about potential changes in price movement. Traders use indicators to tailor their trading strategies in accordance with these predictions to maximize their profit and avoid taking unnecessary risks.

Here you’ll learn what indicators really are and what types of indicators you can use in your trading.

Understanding indicators

It’s important to have an understanding of how trading indicators work before using them in practice. The way indicators predict what is going to happen with the market is based on historical data. Indicators analyze different information and data, including the opening price, the closing price, volumes. Depending on the data analyzed and its application, there are trend indicators, momentum indicators, volume indicators, volatility indicators, and support and resistance indicators. Traders can combine different indicators to learn more about where price movement is going next, but it’s generally advisable to select only a few indicators and learn how to use them properly.

But despite different functions and applications, all indicators fall into two large groups: economic and technical indicators.

Economic indicators

Economic indicators are based on the global and national economic events that may affect asset prices. If traders choose to use such indicators, they should follow all the world news and pay attention to the economic calendar provided by the brokers. Economic indicators are used in fundamental analysis.

Technical indicators

Technical indicators are based on mathematical formulas automatically applied to the market situation by your request. They help to predict a price trend and help you decide on opening or closing a position. Technical indicators are used in technical analysis. For more detailed info, read about the best forex indicators.

Examples of indicators

Let’s look at a couple of examples of economic and technical indicators.

Consumer Price Index (CPI)

Consumer Price Index, or CPI, is one of the most used economic indicators that measures changes in prices over a basket of consumer goods and services. The CPI is also commonly used by official authorities and financial marketers to measure changes in the cost of living and identify inflation in a country’s economy.

The price of assets also tends to be more volatile when inflation is high, so the CPI helps plan their trading strategy around this possible volatility. It can also warn Forex traders in advance about potential changes to monetary policies of the countries that can either weaken or strengthen the position of a currency against other currencies in the market.

Moving Average (MA)

A Moving Average, or a MA, is a technical indicator tool that analyzes the price of an asset over a specific time period to determine the direction of a trend and support or resistance levels. MAs help traders to better understand the price data presented on a chart and predict the potential direction of price movements. They can also generate trading signals for traders to enter or exit their trades.

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2022-11-22 • Updated

Frequently asked questions

What is a key performance indicator?

A key performance indicator is a type of indicator that measures a company’s success. It usually takes into account the company’s net profit, revenues or liquidity and cash availability.
What is an RSI indicator?

The Relative Strength Indicator (RSI) identifies differences between the amounts of recent gains and recent losses. It is a technical indicator that determines the direction and speed of asset’s movement.