What is an indicator? How it is used, types and examples

What is an indicator?

Indicators are statistics used to measure current conditions as well as predict financial or economic trends.

In the world of investing, indicators typically refer to technical chart patterns derived from the price, volume, or open interest of a given security. Common technical indicators include moving averages, moving average convergence divergence (MACD), relative strength index (RSI) and off-balance volume (OBV).

In economics, indicators usually refer to pieces of economic data that are used to measure the general health of the economy and predict its direction. These include the Consumer Price Index (CPI), Gross Domestic Product (GDP) and unemployment figures.

Understand indicators

Indicators can be broadly categorized into economic indicators and technical indicators.

Economic indicators are statistical measures 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 operating conditions are used to provide insight into the future profitability potential of public companies.

Technical indicators are widely used in technical analysis to predict changes in stock trends or price patterns in any traded asset.

Economic indicators

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 US Department of Labor, compiles data on prices, employment and unemployment, compensation and working conditions, and productivity. The price report contains information on inflation, import and export prices and consumer spending.

The Institute of 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 includes a composite index, the Purchasing Managers’ Index (PMI), which contains information on manufacturing and non-manufacturing orders. The index is a careful barometer of economic activity.

The US 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 home sales prices, and the NAHB/Wells Fargo Housing Market Index, which is a survey of homebuilders that measures market appetite for new homes.

Other economic indicators include interest rates, the money supply and consumer sentiment.

Technical indicators

In the context of technical analysis, an indicator is a mathematical calculation based on a security’s price 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 return to a trend line.

The RSI compares the size of recent gains to recent losses to determine the asset’s price momentum, whether up or down. Using tools such as the MACD and the RSI, technical traders will analyze assets’ price charts in search of patterns that will indicate when to buy or sell the asset under consideration.

Examples of indicators

Consumer Price Index (CPI)

One of the most common economic indicators is the Consumer Price Index (CPI), which is simply the weighted average price of a basket of consumer goods and services. Changes in CPI are used to measure changes in the cost of living and to identify periods of inflation or deflation.

At the time of writing (summer 2021), investors are becoming increasingly concerned that rising inflation will eventually end the bull run in the stock market. In April 2021, the CPI rose by 0.8%, making it the largest 12-month increase since September 2008.

Moving Average (MA)

Moving average (MA) is a technical indicator used to identify the general direction, or trend, of a given stock. Its purpose is to smooth historical price data by generating a continuously updated average price.

If the MA moves in a positive (negative) direction, it is a bullish (bearish) sign for the stock.

At the time of writing, Amazon stock recently broke through its 50-day moving average, suggesting it is an attractive pick from a technical standpoint.

Indicator FAQ

What is a common indicator of a phishing attempt?

Emails that are completely unsolicited, contain multiple typos, require urgent action, and require unusual action from you are all indicators of a phishing attempt.

Which economic indicator generally describes falling prices?

A steadily falling CPI is an indicator of generally falling prices.

What is a key performance indicator?

A key performance indicator refers to a quantifiable measurement used to measure a company’s success against a specific target or objective. Common KPIs include net profit, sales and customer retention rate.

What is an RSI indicator?

The relative strength index (RSI) is a technical analysis indicator that compares the size of recent gains to recent losses. RSI is used to determine the asset’s price momentum, either up or down.

What is the real progress indicator?

Genuine progress indicator (GPI) is a measure used to measure a country’s economic growth rate. It is often considered a more reliable measure of economic progress than the more commonly used gross domestic product (GDP) figure.

What are indicators of a company’s profitability?

Commonly used indicators of a company’s profitability include gross margin, operating margin, net margin and return on equity (ROE).