Indicators and confirmation

Reading for India · about 5 min

Start with the warning

Every indicator in this cluster is calculated from price and volume. Nothing else goes in.

That single fact settles most arguments about indicators before they start. No indicator can tell you anything that price has not already said. It cannot see the order book, the company, the news or the intentions of anybody trading. It takes numbers you already have and rearranges them.

So what is an indicator actually for?

An indicator makes one property of price easier to see. A moving average makes direction easier to see by removing the noise around it. RSI makes the speed of recent movement easier to see by converting it to a number between 0 and

ATR makes the size of a normal day easier to see. Each one takes a fact that

was buried inside the price series and puts it on the screen where a human eye can read it.

For that service, it charges a fee, and the fee is always the same currency: delay. A moving average is smooth because it is late. MACD is stable because it is late. ADX is reliable because it is very late. The smoother and more trustworthy an indicator looks, the more of the move has already happened by the time it speaks.

There is no exception to this. An indicator that reacts instantly is just price with extra arithmetic, and it will give you a signal on every wobble. An indicator that never gives false signals is one that arrives after the move is over. Every setting you can change is a control for choosing where on that line you want to sit. It is not a control for making the trade-off go away.

A reader who finishes this cluster should end up using fewer indicators than they started with, not more.

That is the honest goal, and it is the opposite of what most indicator material is written to achieve. Most charts carrying 6 indicators are carrying 1 opinion in 6 costumes, because 5 of them read the same closing price and produce the same answer with different arithmetic. Article 18 gives you a 5-minute audit that will show you exactly how many independent inputs your own chart contains. Most readers find the number is 1 or 2.

How these 19 articles are built

Each article does the same 4 things, in the same order.

States what the indicator measures, in arithmetic, not in adjectives.
States exactly where it breaks, and why the break is built into the construction rather than being bad luck.
Gives a conditional decision rule — if this and this, then it usually means that, unless this third thing.
Ends with a counting exercise on your own charts, usually taking 5 minutes, which lets you check the article's claim with your own data.

You will notice something about the counting exercises. Almost every one of them asks you to count how often the indicator was wrong. That is deliberate. Nobody who sells indicators publishes that count, and it is the only number that decides whether the tool belongs on your chart.

Nothing here names a stock to buy. Nothing here gives you a signal rule that works. Every rule in this cluster is conditional, and every article states the condition under which the rule fails.

The reading order

The articles build on each other. Read them in order the first time.

The map

Types of indicators — leading, lagging and the four families — hundreds exist and they answer only 4 questions. Early and wrong, or late and right. Choose knowingly.

Trend and momentum

Moving averages — the trader's first tool — one line that produces the most signals exactly where it works least.
Oscillators explained — overbought, oversold and momentum — overbought does not mean sell. It measures speed, not value.
RSI — the Relative Strength Index — average gains against average losses, over 14 days. Below 30 is not a buy.
Stochastic Oscillator — momentum within the range — where today's close sits inside the recent range, and why the setting is a choice you made.
MACD — Moving Average Convergence Divergence — the distance between 2 averages. Measure its lag in days, on your own chart.

Volatility and volume

Bollinger Bands — volatility and the squeeze — the bands measure volatility, not value. A touch is not a signal.
OBV — On-Balance Volume — a running total signed by the close. Not a window into institutional behaviour.
VWAP — Volume-Weighted Average Price — the benchmark institutional execution is graded against, which is why price reacts near it. It resets every day.

Trend strength and trend systems

ADX and DMI — measuring trend strength — the filter that tells you which of your other tools to trust today.
Parabolic SAR — the trailing-stop indicator — a trailing stop, not a forecast. Count the whipsaws.
Supertrend — the retail trader's favourite trend tool — one coloured line built from ATR. Multiply the flips by the band width.

Extremes, and a complete system

CCI — the Commodity Channel Index — how far price has strayed from its own average, with no upper limit.
Ichimoku Cloud — a whole system on one chart — 5 lines of range midpoints, shifted in time. Start with the cloud alone.

Levels and risk

Pivot points — the day's levels, calculated last night — yesterday's high, low and close, turned into today's levels.
ATR and volatility stops — the most useful number in this cluster, and it is not a signal.

Putting it together

Divergence — when price and momentum disagree — the new high was reached more slowly than the last one. A warning, never a trigger.
Confluence and confirmation — and the overload that fakes it — 5 indicators agreeing is often 1 opinion in 5 costumes. Audit your inputs.
Volume analysis and market breadth — an index can rise while most of its stocks fall. Breadth is how you check that in real time.

The checklist

Every article ends in an action on your own screen. Collected here, they are 1 weekend's work, and they are worth more than the articles themselves. The number in brackets is the article.

Do these once, on your own trade history

Compare your last 10 fills to the VWAP at the moment you traded. Count how many buys sat above it and how many sells sat below it. (9)
Sort your last 20 closed trades by the ADX reading on the entry day. Split into 2 halves and total each. (10)

Do these once, on the chart you actually use

List every indicator on the chart and write down its inputs. Count the distinct inputs. (18)
For every position you hold, divide the distance to your stop by the ATR. Write the result in a column. (16)

The counting exercises, one per tool

Put RSI and Stochastic on one chart and count how often they disagree. Then replace Stochastic with OBV and count again. (1)
Count 50/200 moving average crossovers on a trending chart and on a ranging chart. Then check what followed each one. (2)
Count RSI readings above 70 on a trending stock and on a ranging stock. Mark each one fell or did not fall. (3)
Mark every RSI reading below 30, then split them by whether the 200-day average was rising or falling. (4)
Count Stochastic extreme crossovers at period 14, then 5, then 21, on the same chart. (5)
For the 3 largest swings on a chart, count how many days late the MACD crossover was and how much of the swing had gone. (6)
Count Bollinger Band touches on a ranging and a trending chart. Then find the narrowest band width of the year and note what followed. (7)
Find the 3 largest volume days of the year and see how much of the OBV line they built. (8)
Count Parabolic SAR flips in a year. Mark each one followed through or whipsaw. (11)
Count Supertrend colour changes, multiply by the average band width, and compare the total to the year's price move. (12)
Count CCI crosses above +100 and check the next 10 days. Then note the CCI reading at the start of the year's largest moves. (13)
Shade every stretch where price sat inside the Ichimoku cloud and measure what price did during them. (14)
Compute the pivot for the last 20 sessions by hand and count how many days opened and closed on the same side. (15)
Find 3 bearish and 3 bullish divergences and check 20 sessions later. Then check whether the year's largest falls had one at all. (17)

A habit worth keeping

On any day the index rises, count how many of its members actually rose, and how many of your own holdings did. (19)

India and the United States, equally

Every article covers both markets at the same depth, and then adds the section almost nobody writes: where the 2 differ, and what that difference tells you.

For indicators this section does real work, because the differences are mechanical and they change the arithmetic. Indian circuit bands cap the daily range, which shrinks ATR and ADX exactly when the market is most violent. United States overnight gaps inflate the same inputs, because most results are announced outside market hours. The Indian closing price is itself a volume weighted average of the last 30 minutes, while the United States close comes from a single auction. India publishes delivery volume and the United States does not. The United States publishes decades of breadth data and India does not.

None of that is trivia. An indicator is arithmetic applied to exchange data, and when the exchange rules differ, the arithmetic produces a different number for the same market condition. Most indicator writing reaching Indian readers was produced for American conditions and copied without translation. Those sections are the translation.

A note on what this is not

These lessons are free and they will stay free. They are the text version of the ideas in our video course, written for anybody who cannot spend money on learning right now.

They will take you longer than the videos would. But the goal is the same one it has always been: fewer people in the 95%.