I have met numerous traders that, when exposed to technical indicators and studying them, have thought to themselves that they have discovered the answer to succeeding at trading. The 'newbies' all think that these mathematical formulas predict every move in the market and they are never wrong. However, the truth is just the opposite as they often fail and result in losses.
There is nothing magical about technical indicators. They are just a derivative of price and are only meant to make it easier for the trader to see what is happening on the chart. It is very important to keep in mind that price is the most significant information a trader can have, but as mentioned earlier, indicators can help a trader analyze the charts.
Indicators are also great for when the trader needs to be able to quantify the data when they are looking at automating a trading system. But before learning about the individual indicators it helps knowing that they can be split up in 3 major categories.
Lagging Indicators which are more commonly known as trend following indicators. They are often calculated using a higher number of price bars which is the reason they lag relatively more compared to the Leading Indicators. They all lag but more than the others hence the names leading and lagging. Traders use them to filter out volatile price action and other "market noise". The trader can then easily focus on what the chart is telling them.
Because this technical indicator uses a higher number of price bars it is often used to determine the trend. Lagging indicators are also created differently than Leading indicators as it they don't swing between two sets of fixed values. The Moving Average is without a doubt the most used lagging indicator.
Leading Indicators tries to predict turning points by putting more weight to the most recent price bars. They often come in the form of a momentum oscillator and measures the rate of change. It uses this rate of change in its calculation where the results are plotted on a price chart and more often than not, below the price. The majority of the time, traders use these Leading Indicators to locate overbought/oversold levels by using upper levels as overbought and lower levels as oversold.
Using these is not always great as there are both pros and cons. The upside is that the Leading Indicator tries to provide you with an entry as early as possible. This improves your Risk-Reward ratio. It also gives you more signals than the Lagging ones do but there are also more false signals as it "predicts" price moves instead of acting on past price. The most common Leading Indicators are Stochastic, Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).
Confirming Indicators, as the name suggests, is used to confirm price moves by for example using volume and price combined. Hopefully every trader knows how a volume increase at breakout suggests that the breakout is valid and will continue in the direction of the breakout.
Confirming Indicators use both price and volume to create a plot on the charts that then helps the trader ignore fake trends and breakouts. This will undoubtedly improve the trader's profit by minimizing losses. The most used Confirming Indicator is probably On Balance Volume. It is very simple to use but very helpful.
If you are interested in learning more about the individual technical indicators then feel free to watch all the free videos on my website. I have listed the best videos I could find on the subject.