Lesson 5: Indicators
Before you start adding tools to your chart, you need to understand what they are and what they aren’t. Indicators don’t make you smarter than the market. They don’t predict turning points. They don’t create edge on their own. They simply help you interpret information that already exists.
Why indicators exist?
Indicators are helpful tools, they are not decision-makers. They are simply mathematical transformations of price and volume.
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They don’t know the future.
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They don’t see hidden data.
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They don’t predict reversals.
They just reorganise information you already have. You can see the price of a stock and the indicator just displays that price data via an alternative visual.
Used properly, they add clarity. Used badly, they create noise.
The biggest mistake
Most beginners:
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Add multiple indicators
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Wait for “confluence” - when two or more indicators all align for the 'holly grail' signal
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Freeze when signals conflict
More indicators in our view does not equal better decisions. It usually means less conviction. If price and structure aren’t clear, indicators won’t fix it. Basically a messy price on the chart will lead to a messy set of indicators.
Leading vs lagging (misunderstood)
You’ll often hear:
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“This is a leading indicator.”
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“That one lags.”
Reality:
All indicators lag, because they’re derived from past price. Some just react faster than others. The goal isn’t prediction. The goal is confirmation and structure.
Common Indicators
1. Moving Averages – Trend filter
A moving average smooths price.
It helps answer:
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Is the market trending?
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Is this a pullback or a breakdown?
Common uses:
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50-day MA for medium-term trend
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200-day MA for structural trend
In Weinstein’s framework:
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Stage 2 Uptrends will be above 50 and 200 day moving averages
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Stage 4 Downtrends will see price below falling moving averages
Moving averages are simple and effective. At FoundryStrat, we use Exponential Moving Averages (EMA) as opposed to Simple. They give weight to more recent price action.
2. RSI – Momentum gauge
RSI (Relative Strength Index) measures speed of movement and it helps you see:
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Overextended moves
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Momentum shifts
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Divergences, which are when price continues in one direction but the RSI begins to move in the opposite direction.
Important note, RSI being “overbought” does not mean sell or vice-versa. In strong uptrends, markets stay overbought for days, weeks or months.
Use RSI to:
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Spot potential pullbacks and get ready to take action.
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Spot weakening momentum
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Do not use it to fight trends
What we prefer over RSI, is Relative Strength (RS). RSI simply looks at the strength of the one stock you're looking at, rather RS compares the strength of the stock to that of the wider market. So you can see if a stock is performing well vs. what the market is actually doing. This is really helpful for picking up strong momentum stocks.
3. Volume – Participation
Volume confirms:
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Breakouts
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Breakdowns
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Key levels
High volume can signal commitment to the next move. Low volume can equal hesitation or simply a lack of buying or selling. We like breakout trades on heavy volume at FoundryStrat. It's very much in the style of William O'Neil, Stan Weinstein or Mark Minervini. Price contracts (moves sideways), volume dries up because there's no supply (sellers) coming into the market. Sellers come in and push the market higher on high volume - this demonstrates there's actual force and conviction behind the move.
4. MACD – Momentum and divergence
MACD stands for Moving Average Convergence Divergence. It is a momentum indicator built from moving averages and helps answer:
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Is momentum strengthening or weakening?
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Is the trend still healthy?
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Is price moving one way while momentum is moving another?
That last point is one of its most useful features: divergence.
Above is a bearish divergence when price makes a higher high, but MACD makes a lower high. That can suggest the move is losing strength, even if price still looks strong. In the Microsoft example, the divergence is confirmed when the price makes a new high but the MACD lines are lower - the price subsequently falls by 15%.
A bullish divergence is when price makes a lower low, but MACD makes a higher low. The opposite from the above. That can suggest selling pressure is fading and momentum is beginning to improve.
At FoundryStrat, we do not use MACD as a standalone buy or sell signal. We use it as a supporting tool to assess the quality of a move.
It is most useful for:
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Confirming whether momentum is supporting a breakout
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Spotting when a trend is beginning to lose force
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Highlighting divergence before a pullback, reversal or period of consolidation
Important note: divergence is not a timing signal on its own. A market can keep rising or falling for some time before price reacts. MACD works best when combined with price, volume and trend. Price shows what the market is doing. MACD helps show how much strength sits behind that move.
What to avoid
Be cautious with:
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Too many oscillators
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MACD + RSI + Stochastics all at once
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Constant parameter tweaking
If you have to optimise settings constantly, you’re curve-fitting or as we like to put it, in search of the holy grail.
Indicators in the Foundry Strat framework
At FoundryStrat, indicators should:
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Confirm structure
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Clarify trend
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Help with timing
They should never:
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Override structure
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Replace risk management
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Create trades that aren’t already obvious
If a setup needs three indicators to justify it, it probably isn’t strong.
A simple indicator checklist
Before acting, ask:
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What does structure say?
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Is price aligned with the higher timeframe?
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Does momentum support the idea?
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Is volume confirming the level?
The real edge
Your edge won’t come from:
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A secret setting
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A hidden indicator
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A new oscillator
It comes from:
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Consistency
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Risk management
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Recognising environments or structure
Indicators help you stay disciplined and nothing more. Use them as guide rails initially.
What’s next?
Now that you understand how to read charts and use tools properly, it’s time to step beyond price.
Next we’ll look at how to analyse a stock and what actually drives long-term performance.
