What an indicator is

The chart menu has more than twenty indicators, and each looks like a secret weapon. Good news: none of them is magic. Each is an ordinary recipe – it takes a few recent candles, computes something from their prices and draws the result as a line. Professor Wick calls it a cookbook: candles in, line out.

A recipe for a line#

The simplest indicator is the moving average: add up the closing prices of the last N candles and divide by N. The result is one point. Then the window moves by one candle and you compute again. Point by point, a line appears. Click Next and watch it grow:

Notice two things. The line is made only from past candles – there is nothing about tomorrow in it. And it is smoother than the price: one wild day melts away in an average of five.

Every indicator lags#

Because the average also counts older candles, it turns only after the price has turned. This is called lag. The more candles an indicator takes, the smoother it is – and the more it lags:

That is not a bug, it is the price of smoothness. A fast indicator gives a signal early, but often a false one. A slow one is wrong less often, but comes late. This whole course keeps coming back to it.

Repainting: the last candle lies#

The last candle on the chart is not finished yet – the price is still moving in it. And with it moves the last value of every indicator. A signal you see in the middle of the day can be gone by midnight. This is called repainting.

The standard indicators in an exchange's menu no longer change a closed candle. So the rule is simple: a signal counts once the candle has closed.

Common myths#

• "The indicator knows something the price does not." It is computed only from the price (and maybe volume). Different glasses, not a different world.
• "A faster indicator is better." It is faster – and wrong more often. A slower one is calmer – and later.
• "A signal on a running candle counts." It counts once the candle closes. Until then it can change.