What is an ‘Indicator’
Indicators are statistics used to measure current conditions as well as to forecast financial or economic trends.
BREAKING DOWN ‘Indicator’
Indicators can be broadly categorized into economic indicators and technical indicators.
Economic indicators are statistical metrics used to measure the growth or contraction of the economy as a whole or sectors within the economy. In fundamental analysis, economic indicators that quantify current economic and industry conditions are used to provide insight into the future profitability potential of public companies.
Technical indicators are used extensively in technical analysis to predict changes in stock trends or price patterns in any traded asset.
There are many economic indicators created by different sources in both the private and public sector. For example, the Bureau of Labor Statistics, which is the research arm of the U.S. Department of Labor, compiles data on prices, employment and unemployment, compensation and work conditions, and productivity. The price report contains information about inflation, import and export prices, and consumer spending.
The Institute for Supply Management (ISM) is a not-for-profit professional association for supply management and purchasing professionals. It has published its ISM Manufacturing Report on Business monthly since 1931. The report contains a composite index, the Purchasing Managers’ Index (PMI), which contains information on manufacturing and non-manufacturing orders. The index is a closely watched barometer of economic activity. The U.S. Department of Commerce uses ISM data in its evaluation of the economy.
For most of the 21st century, housing and real estate have been leading economic indicators. There are several metrics used to measure housing growth including the S&P/Case-Shiller Index, which measures house sale prices, and the NAHB/Wells Fargo Housing Market Index, which is a survey of home builders that measures the market appetite for new homes.
Other economic indicators include interest rates, the money supply, and consumer sentiment.
In the context of technical analysis, an indicator is a mathematical calculation based on a security’s price and/or volume. The result is used to predict future prices.
Common technical analysis indicators are the moving average convergence-divergence (MACD) indicator and the relative strength index (RSI).
The MACD is based on the assumption that the tendency of the price of a traded asset is to revert to a trend line. In order to discover the trend line, traders look at the moving averages of asset prices over different time periods, often over 50 days, 100 days and 200 days. In addition, moving averages can be either simple or exponential.
The RSI compares the size of recent gains to recent losses to determine the asset’s price momentum, either up or down. Using tools like the MACD and the RSI, technical traders will analyze assets’ price charts looking for patterns that will indicate when to buy or sell the asset under consideration.