Indicators Introduction

Technical indicators are mathematical calculations applied to price and volume data that help traders identify trends, momentum, and potential reversal points. Unlike candlestick patterns (which read the shape of individual candles) or chart patterns (which read geometric formations across many candles), indicators transform raw market data into smoothed lines, bands, or oscillating values that make signals easier to spot. Engulfy scans for indicator signals automatically so you don't have to watch charts all day.

What Are Technical Indicators?

At their core, technical indicators are formulas that take raw market data — price, volume, or open interest — and output a value (or series of values) that you can plot on a chart. The goal is to distill noisy price action into cleaner signals. For example, a moving average smooths out day-to-day price fluctuations so you can see the underlying trend more clearly.

Indicators don't add new information — they reorganize the information that's already in the price data. Think of them as lenses: each indicator gives you a different view of the same underlying market activity. Some lenses highlight trend direction, others highlight momentum, and others highlight volatility.

Types of Indicators

Technical indicators fall into two main categories based on where they appear on a chart:

• Overlay indicators — plotted directly on top of the price chart because their values are in the same scale as price. Examples include Moving Averages (SMA, EMA), Bollinger Bands, and the Ichimoku Cloud. These are great for identifying trend direction and dynamic support/resistance levels.
• Oscillators — plotted in a separate panel below the price chart because their values are on a different scale (often 0–100). Examples include RSI, StochRSI, MACD, and the Stochastic Oscillator. These excel at spotting overbought/oversold conditions and momentum shifts.

Leading vs. Lagging Indicators

Another way to categorize indicators is by their timing:

• Leading indicators — attempt to signal moves before they happen. Most oscillators (like StochRSI) are considered leading because they can show that momentum is weakening before the trend actually reverses. The trade-off is more false signals.
• Lagging indicators — confirm trends after they have started. Moving averages are the classic example: they smooth past data, so they inherently lag behind price. The trade-off is that you enter later but with more confirmation.

Neither type is "better" — they serve different purposes. Experienced traders often combine one leading and one lagging indicator to get both early warnings and trend confirmation. This is exactly what Engulfy does with SMA (lagging) and StochRSI (leading).

Indicators Engulfy Tracks

Engulfy currently tracks two complementary indicators. Together they cover both trend (where is price heading?) and momentum (how strong is the move?).

How Indicators Generate Signals

The most common way indicators produce actionable signals is through crossovers. A crossover occurs when one line crosses above or below another line. For example:

• SMA crossover — when a shorter-period moving average (e.g., 10-day SMA) crosses above a longer-period one (e.g., 20-day SMA), it suggests upward momentum is building. When it crosses below, it suggests downward momentum. The famous "Golden Cross" (50 crossing above 200) and "Death Cross" (50 crossing below 200) are widely followed SMA crossover signals.
• StochRSI crossover — when the %K line crosses above the %D line in the oversold zone (below 20), it suggests the asset may be starting to bounce. When %K crosses below %D in the overbought zone (above 80), it suggests the asset may be starting to pull back.

Engulfy scans for these crossovers automatically across every ticker you subscribe to, on daily, weekly, monthly, and quarterly timeframes. When a crossover is detected, you receive a notification so you can evaluate the opportunity.

Combining Indicators with Price Action

Indicators work best when they are not used in isolation. The most reliable signals come from confluence — multiple independent signals pointing in the same direction at the same time. For example:

• A bullish engulfing candlestick pattern forms at a known support level.
• At the same time, the StochRSI %K line crosses above %D from the oversold zone.
• The price is near the 50-day SMA, which is acting as dynamic support.

When candlestick patterns, support/resistance levels, and indicator signals all agree, the probability of a successful trade improves significantly. This is why Engulfy tracks both candlestick patterns and technical indicators — so you can spot confluence more easily.

Common Mistakes

• Over-reliance on indicators alone — Indicators summarize past data; they don't have a crystal ball. Always consider the broader context: what is the overall trend? Is there a major news event coming? What does the price structure look like?
• Using too many indicators (analysis paralysis) — Adding more indicators doesn't necessarily improve your analysis. Many indicators are derived from the same underlying data (price), so they often say the same thing in different ways. Two or three well-chosen indicators that complement each other is usually enough.
• Ignoring the underlying trend — Oscillators can stay overbought for extended periods during a strong uptrend, or oversold during a strong downtrend. Fading a strong trend just because an oscillator says "overbought" is a common and costly mistake.

For a comprehensive reference on technical indicators and how to use them in context, see John Murphy's Technical Analysis of the Financial Markets — widely considered the definitive textbook on the subject.