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- The Truth About Indicators: What Works, What Doesn’t
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- The Truth About Indicators: What Works, What Doesn’t
- One trend filter (e.g., 50 EMA)
- One volatility tool (e.g,. ATR for stops)
- One timing/momentum indicator (e.g., RSI)
News & AnalysisNews & AnalysisMany traders begin their exploration of indicators with the assumption that “more tools” equals “more clarity.”
The result is stacking indicator after indicator into the chart in the hope that it will reveal the perfect moment for entry when everything aligns.
But rather than offering clarity, it often results in conflict with some indicators suggesting “buy,” while another says “wait.”
What Are Indicators and What Are They Not?
Indicators are tools, not predictors.
They don’t forecast the future, they analyse past price movement and associated variables and relationships using mathematical formulas.
They cannot tell you with certainty what will happen next, eliminate risk, prevent losses, or work consistently in every market condition with every asset type.
However, this does not mean they are not useful. Previous price action does have an influence on current price movement.
What indicators can help with is quantifying market behaviour up to a point in time. They provide context for current price action and have a strong role in defining potential risk parameters like stops or targets.
Price action should always be king for both entry and exit trading decisions. But some confluence (the level of agreement or refuting what you see in price) relating to the overall context can also be key to system development and implementation.
Additionally, strong, specific, and unambiguous objective criteria can offer some clarity and consistency in action, which is crucial for performance evaluation.
What Are You Actually Measuring?
You should never use an indicator as part of your decisions unless you know what it is telling you about the market.
Indicators are at their most powerful when combined with current price action and market structure (e.g., key levels).
Most indicators fall into one of four core types:
1. Trend-Following Indicators
Examples: Moving Averages (MA), MACD, ADX
What they do: Smooth price to identify direction and filter out potential market noise
How they help: Keep you trading in the dominant direction. e.g., by checking trends on longer timeframes or through comparison of different period MA’s can give confirmation that trend may be nearing its end, changing, or has changed already.
2. Momentum Indicators
Examples: RSI, Stochastic,
What they do: Measure the speed and strength of price moves
How they help: Can help spot overbought/oversold areas that mean the market may be more likely to change. Some also utilize them to look for divergence in direction versus price as a suggestion that things may be about to change.
3. Volatility Indicators
Examples: ATR, Bollinger Bands,
What they do: Measure how far the price is moving within a specified chart time window
How they help: Stop loss and take profit level placement. e.g., a multiple of current ATR may help anticipate breakouts and can be used in some mean reversion strategies on a price reversal or bounce.
4. Volume-Based Indicators
Examples: Volume Profile, Average, and relative volume
What they do: Indicate buying and selling activity behind price moves.
How they help: Show commitment behind a move and may indicate the strength of a move or deviation from the norm.
Where they fail: Limited usefulness in markets with unreliable volume data (e.g., spot FX)
Common Indicator Errors
1. Stacking Indicators That Do the Same Thing
This is probably the most common mistake people make with indicators.
For example, using RSI and Stochastic at the same time —they’re both momentum indicators.
This leads to confirmation bias, not confidence.
2. Only Trading When Everything Aligns
Waiting for all your indicators to “line up” may delay good trades.
This should not take away from having clear criteria articulated in your trading plan, but if you have a system that is too complex, you will find it becomes too hard to implement, and you end up ignoring your criteria anyway.
3. Attempting to Use Indicators to Fix a Poor System
“If I just add this one more indicator filter, I can avoid bad trades.”
This is rarely the case. The primary reasons traders run into problems are that their system is poorly defined or there are problems following it.
Adding yet another indicator to the many you may already have is unlikely to make any difference.
This mindset leads to paralysis. Risk is part of trading — indicators refine edge, not remove risk.
4. Following Signals Without Price Action or Market Context
Blindly buying on MACD crossover or RSI below 30 not only ignores actual price but also other key factors such as market structure, news, sentiment, or time of day, all of which can have a massive impact on what happens next.
Purposeful Use of Indicators
The most effective traders simplify. They use fewer indicators but aim to use them in a better way.
Here is some practical guidance that is worth considering:
Use One or Two Indicators Per Function:
This will help keep your chart clean, your strategy simpler, and your decision-making fast.
Make Each Indicator Answer a Specific Question:
Before you add any decision-making tool to your chart, consider what question you are trying to answer about your trading idea and which indicator serves this best.
Use Indicators to Support Structure — Not Replace It:
Remember that it is price that tells the story. Indicators provide extra evidence to support any price-based decision.
Indicator Audit Checklist
This 6-question checklist can help you decide whether to keep, remove, or replace an indicator on your chart.
Question Yes No Does this indicator provide information I don’t get elsewhere? Worth keeping Likely redundant Do I understand how it is calculated and what it is measuring? Use it with confidence Learn it or remove it Does it align with my trading style? Relevant Misaligned Does it help me make faster/more confident decisions? Value-adding Cluttering judgment Is it part of a clearly defined process? Purposeful Arbitrary Have I backtested or forward-tested it within my system? Proven Dangerous guesswork Final Thoughts
Indicators are not the enemy of the trader, but it is clear that the indiscriminate use of them may be ill-advised.
Consider carefully what you are going to put on your chart, making sure that you strive for clarity in your trading system processes first, and then indicators can prove to be invaluable.
Ready to start trading?
Disclaimer: Articles are from GO Markets analysts and contributors and are based on their independent analysis or personal experiences. Views, opinions or trading styles expressed are their own, and should not be taken as either representative of or shared by GO Markets. Advice, if any, is of a ‘general’ nature and not based on your personal objectives, financial situation or needs. Consider how appropriate the advice, if any, is to your objectives, financial situation and needs, before acting on the advice. If the advice relates to acquiring a particular financial product, you should obtain and consider the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) for that product before making any decisions.
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