Indicators Without Illusions
Every standard indicator is derived from price and therefore lags it. Their value is in standardising your decisions, not in predicting.
Every standard indicator is a mathematical transformation of price. None of them sees the future, and none of them contains information the chart does not already show.
That is not an argument against using them. It is an argument for using them for what they are genuinely good at: standardising your decisions so you make the same call on the same setup every time.
Moving averages: trend and dynamic support
A moving average smooths price over a lookback window. Its slope and its position relative to price give you a simple, objective read on trend direction.
In a trending market, moving averages often act as dynamic support or resistance, with price pulling back to them and continuing. In a range, they flatten and generate constant false signals. Their usefulness is entirely regime-dependent.
RSI measures momentum, not permission
The Relative Strength Index compares the size of recent gains to recent losses, normalised to a 0–100 scale. It tells you how strong recent movement has been, in one direction or the other.
The common error is reading a high RSI as a sell signal. In a strong trend, RSI can stay above 70 for weeks while price keeps climbing. It is a momentum reading, not a reversal signal, and treating it as one is a reliable way to fight a trend.
ATR: the one traders underuse
Average True Range measures typical movement over a period, in price units. It says nothing about direction, which is precisely why it is so useful.
ATR is best applied to position sizing and stop placement. A stop set at a multiple of ATR adapts automatically as volatility changes, keeping your risk consistent in currency terms whether the market is quiet or wild.
* This chart uses synthetic data to demonstrate the indicator's behavior in typical market conditions.
Bollinger Bands and volatility
Bollinger Bands place a moving average with bands set at a number of standard deviations above and below it. They widen when volatility rises and contract when it falls.
The squeeze — a period of unusually narrow bands — signals compressed volatility, which often precedes expansion. Note that it signals expansion, not direction. It tells you something is coming, never which way.
The stacking trap
When two indicators disagree, the instinct is to add a third to break the tie. This produces a system that is fitted to the last few candles and untestable going forward.
If your indicators regularly conflict, the problem is usually that you have not defined the market regime you are trading. Pick tools that measure different things — one for direction, one for volatility — rather than three that measure the same thing differently.
Key takeaways
- All standard indicators derive from price and therefore lag it
- RSI measures momentum; overbought does not mean sell
- ATR is best used for sizing and stops, not for direction
- Adding a third indicator to break a tie is curve fitting, not analysis
- Moving averages define trend and dynamic support
- RSI measures momentum, it does not mean overbought equals sell
- ATR measures volatility and is best used for stops and sizing
- Bollinger Bands widen and narrow as volatility changes
Adding a third indicator to resolve a disagreement between the first two.
Reading is not verification
Take the concept you just read and turn it into explicit rules, then test it. That is the only way to know whether it actually works.
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