Intro to technical indicators

The difference between amateur and professional trading isn't knowing countless indicators — it's knowing which ones matter. In this lesson, we understand the difference between technical and fundamental analysis, introduce the essential categories of indicators, and most importantly, discover why price action serves as the cornerstone of successful trading strategies.

Follow along on your demo account to experiment with the indicators first-hand.

What is technical analysis?

In trading, there are two main types of analysis: technical and fundamental.

• Technical analysis is a method for evaluating and forecasting financial markets by examining statistical trends from trading activities like price movements and volume.
• Fundamental analysis seeks to determine whether an asset's intrinsic value is higher or lower than the value it trades at on the market, and then to make a profit on the assumption that it is undervalued or overvalued.

What is a technical analysis indicator?

A technical analysis indicator is a mathematical tool that uses an asset’s price, volume, or both to help traders evaluate financial markets and make trading decisions. These indicators, often displayed as charts, identify trends, momentum, volatility, and potential entry or exit points.

Common types include:

• Trend indicators, e.g. Moving Averages, MACD
• Momentum indicators, e.g. RSI, Stochastic Oscillator
• Volatility indicators, e.g. Bollinger Bands, ATR
• Volume indicators, e.g. OBV, Accumulation/Distribution Line
• Support and resistance indicators, e.g. Fibonacci Retracements, Pivot Points

Traders typically combine multiple indicators in their technical analysis before making trading decisions, alongside other analysis methods and risk management strategies.

What is the best technical analysis indicator?

That depends on who you ask – every trader has their preferences. However, many traders believe that analysing price activity, or price action, makes sense as the starting point.

This doesn't dismiss the value of other technical analysis tools. Many of these can be used to support or confirm interpretations of price action.

What is price action?

Price action is simply the movement of an asset's price over a certain period. Price action trading focuses on studying chart patterns, trends and price movements.

Price action analysis trading tools

Price action analysis primarily relies on understanding and interpreting price movement patterns on charts. Some of the common tools and resources that traders often use in their price action analysis include:

• Trendlines: Used to identify and confirm directional trends in the charted price movement of financial markets/assets.
• Support and resistance lines: Drawing lines on a chart to identify levels where the price has historically turned or changed direction.
• Chart patterns: Areas where prices consolidate into recognisable formations, such as head and shoulders or triangle patterns, which suggest a trend may continue or reverse.
• Candlestick and bar chart patterns: Specific patterns that suggest short-term price movements may be ending, continuing or reversing. Examples include doji, pin bars, and engulfing patterns.
• Fibonacci retracements and extensions: These help identify potential reversal levels and future price targets based on Fibonacci ratios.
• Elliott Wave theory: The theory that market price moves follow a repetitive fractal pattern consisting of waves.

Types of price charts

Different price charts offer specific advantages in visualising and analysing price data, allowing traders to choose based on their preferences and trading style.

Tip: Traders often use multiple timeframes for a broader perspective on price action. Longer-term charts (daily, weekly, monthly) provide trend overview, while shorter-term charts (hourly, 5-minute) help fine-tune entry and exit points. This multi-timeframe approach enhances precision in trading decisions. Below, notice the difference between the 10-minute and monthly charts:

10-minute chart

Monthly chart

Let’s take a look at some of the most common price charts:

Line chart: This is the simplest type of chart, where the closing prices for each period are connected with a line. It provides a basic overview of price trends.

HLOC chart: HLOC stands for High-Low-Open-Close and refers to the four key price data points for any given time period: the highest price reached, the lowest price reached, the opening price, and the closing price.

Candlestick chart: Candlestick charts display open, high, low, and close prices but use candlestick shapes to represent the data. They provide more visual information about price movements and patterns.

Mountain chart: A mountain chart (also called an area chart) displays price movements as a filled area below a line that connects closing prices over time, creating a mountain-like silhouette that shows overall price trends.

Heikin-Ashi chart: Heikin-Ashi charts provide a smoother representation of price movements by using modified candlestick calculations. They help reduce noise and make trends more visually obvious.

Tick chart: Tick charts display a certain number of trades (ticks) per bar rather than time intervals. They are useful for analysing intraday price movements.

Practical exercise

Practise your technical analysis by drawing some trend lines on your charts. Open your IG demo (or live) account; open your chosen asset’s chart and look for opportunities to create trend lines.

Drawing an uptrend line:

1. Look for at least two higher lows in a rising market.
2. Connect the lowest low to the next higher low using a straight line.
3. Ideally, the line should touch three or more price points to be considered strong.
4. The line should extend to the right, projecting where future support might appear.

Drawing a downtrend line:

1. Look for at least two lower highs in a falling market.
2. Connect the highest high to the next lower high with a straight line.
3. Again, the more touches, the more significant the trendline.
4. Extend it to the right to indicate a potential resistance level going forward.

Tip: Never force the line to fit. Only draw trendlines that are clear and obvious. If you’re not sure where to place it, it probably isn’t valid yet.

In the next lesson, we explore the average true range indicator (ATR) and how to calculate it.