What is an indicator?
Math drawn on a chart, and the two big families: trend and momentum.
Math on a chart
Candles show what price did. An is a line (or a number) made by doing simple math on those prices, then drawing the answer on the chart.
Here is the simplest one. Say a lemonade stand sold cups for $2, $3 and $4 over the last three days. Add them: 2 + 3 + 4 = 9. Divide by 3 days: 9 ÷ 3 = 3. The 3-day average is $3.
Do that every day, put a dot for each answer, join the dots, and you have an indicator called a .
That's all an indicator is: a calculator that runs on past prices. It doesn't know secret news. It can't see the future. It shows the same prices in a new way, so some things are easier to spot.
Where indicators live on the chart
- On top of the candles. Some indicators are measured in dollars, just like price, so they are drawn right over the candles. Moving averages, Bollinger Bands and VWAP live here.
- In a panel underneath. Others are scores, like 0 to 100, so they get their own little box below the chart. RSI, Stochastic and MACD live here.
The two big families
Most indicators belong to one of two families.
1. Trend indicators answer: "Which way is price going?" They smooth out the wiggles so you can see the main direction, the . Moving averages are the most famous.
2. Momentum indicators answer: "How hard is price pushing right now?" is like a bike rolling downhill: it can be speeding up or slowing down. Many momentum tools are , which means they swing back and forth inside a fixed range, like 0 to 100. RSI, Stochastic and MACD are in this family.
There are also helpers that don't fit either family exactly:
- tools measure how wild the moves are (Bollinger Bands, ATR).
- Level tools draw lines where price might pause (Fibonacci, pivot points).
- Volume tools mix in how much was traded (VWAP).
Every indicator is late
Because an indicator is built from prices that already happened, it always reacts after price moves. Traders call this . A thermometer tells you it's hot after the sun is already out. Indicators work the same way.
That doesn't make them useless. A thermometer is still handy! It just means an indicator is a tool for seeing, not a crystal ball for knowing.
Remember
- An indicator is simple math on past prices, drawn on the chart.
- Some sit on top of the candles. Others sit in a panel underneath.
- Trend indicators show direction. Momentum indicators show how hard price is pushing.
- Every indicator is late, because it's built from the past.
Check yourself
1. What is an indicator?
2. Prices were $4, $5 and $6. What's the 3-day average?
3. What does a momentum indicator try to show?
4. Why is every indicator a little late?
Next lesson: Moving averages
Money Tree School is education, not financial advice. Examples use made-up or historical numbers to show how things work; they are not recommendations to buy or sell anything. Markets can lose money.