Technical indicators are represented by a series of observations derived from one or various mathematical calculations processing historical market prices and/or historical volume. Some indicators can be described as rolling statistics processing data over a finite window length.
The interpretation of technical indicators allows the trader to perform a certain action such as entering or closing a certain position.
Depending on their behaviours, technical indicators can be classified into two main categories, leading indicators, and lagging indicators.
Leading indicators, as their name suggests, can anticipate market price variations, they have more predictive power than lagging indicators. While this would suggest that leading indicators are the perfect indicators to use, it must be noted that they do not fully reflect future price variations, and can therefore lead to losing trades.
Lagging indicators on the other hand return delayed information to the user, they reflect what has happened and therefore hold less predictive power than leading indicators, this is why leading indicators are instead used to confirm a price movement such as a new trend. While lagging indicators fully reflect past price variations they suffer from the delay (lag) they produce.
The type of a technical indicator is determined by the information the indicator processes and return. There are 4 main types of technical indicators each one listed below:
You can find more information about each of the above types of indicators in the following pages or by clicking directly on the above links.