Indicators: what they measure and where they lie
Every indicator is arithmetic performed on price. None of them know anything price does not. Understanding what each one calculates tells you exactly when it will mislead you.
The one thing to understand before any of them
An indicator takes past prices, does a sum, and draws the answer. That is all. It cannot see the future, it has no information price does not already contain, and it is always describing what has already happened.
That is not a criticism. A well chosen indicator compresses a lot of price history into something readable at a glance. But anyone selling an indicator as predictive is selling arithmetic as prophecy.
Moving averages: the smoothing tool
A moving average is the average closing price over the last N periods, recalculated every period. A 50 day moving average is simply the average of the last 50 daily closes.
Its job is to strip out noise so the underlying direction is visible. If price is above a rising moving average, the trend over that window is up. That is genuinely all it says, and it is useful.
RSI: how stretched is this move
The Relative Strength Index compares the size of recent gains against recent losses and expresses it from 0 to 100. Above 70 is conventionally called overbought, below 30 oversold.
Here is the part almost everyone gets wrong. Overbought does not mean it will fall. In a strong trend RSI can sit above 70 for weeks while price keeps rising, and shorting because RSI was high is one of the most reliable ways to lose money in a bull market.
RSI is far more useful for divergence: price makes a new high but RSI makes a lower high, meaning the move up had less force behind it than the previous one. That is a genuine warning, though still not a signal on its own.
MACD: are the two averages separating
The MACD subtracts a longer moving average from a shorter one, then draws a moving average of that result. When the lines cross, the short term average has changed direction relative to the long term one.
It is a trend and momentum tool. It works reasonably in trending conditions and produces near constant false crosses in a range, because it is built from moving averages and inherits every one of their weaknesses.
Bollinger Bands and ATR: measuring volatility
Bollinger Bands draw a moving average with two lines set a fixed number of standard deviations above and below. When the market is quiet the bands squeeze together; when it is volatile they expand. A squeeze often precedes a large move, without telling you the direction.
ATR, the average true range, simply measures how much the asset typically moves in a period. It is not a signal at all. It is the correct tool for sizing a stop loss, because a stop should scale with how much the asset actually moves.
The failure mode every indicator shares
All of them assume the recent past continues. That is true in a trend and false at every turning point, which means all of them are least reliable exactly when a correct signal would be worth most.
They also all fail in ranges, because they are built on the idea that direction is meaningful, and in a range direction is noise. This is why a filter that identifies whether the market is trending at all is worth more than any individual indicator.
- Using two or three that measure genuinely different things
- Using them to confirm what structure already told you
- Using ATR for stop sizing, which is what it is actually for
- Knowing what each one calculates before trusting it
- Stacking eight indicators that all measure momentum and calling it confluence
- Shorting because RSI is above 70
- Trading crossovers in a sideways market
- Optimising settings until they fit the past perfectly, which guarantees they fit the future badly
BEFORE YOU MOVE ON
Common questions
What is the best indicator for crypto?
There is not one. Each measures a different thing and each fails in ranges. A combination covering trend, momentum, volatility and volume, read on top of market structure, is far more useful than any single tool.
Does RSI above 70 mean I should sell?
No. In a strong trend RSI can remain above 70 for weeks while price keeps rising. It measures how stretched recent moves are, not when they will end.
Do indicators repaint?
Well built ones calculate on closed candles and do not change afterwards. Some poorly built or deliberately misleading ones redraw history so past signals look perfect. Always test one before trusting it.
Risk warning: crypto is highly volatile and largely unregulated. You can lose everything you put in. Nothing here is financial, investment or tax advice.