What Is an Indicator?

What Is an Indicator?

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

In the world of investing, indicators typically refer to technical chart patterns deriving 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 on-balance-volume (OBV).

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

Understanding Indicators

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.

Economic Indicators

There are many economic indicators created by different sources in both the private and public sectors.

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.

Beware of leaning too heavily on economic indicators to make investment decisions. Economic data is usually far from perfect and still needs to be analyzed and interpreted correctly.

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 revert to a trend line.

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.

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 price average 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 finally upend the bull run in the stock market. In April 2021, the CPI increased 0.8%, making it the biggest 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 smoothen historical price data by generating a constantly updated average price.

If the MA is moving in a positive (negative) direction, that's a bullish (bearish) sign for the stock.

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

Indicator FAQs

What Is a Common Indicator of a Phishing Attempt?

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

What Economic Indicator Describes Generally Declining Prices?

A steadily declining CPI is an indicator of generally declining 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 Genuine Progress Indicator?

Genuine progress indicator (GPI) is a metric used to gauge a country's rate of economic growth. It is often considered a more reliable measure of economic progress than the more widely 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).