Through a series of articles I intend to speak to our readers on the different approaches used to make our trading life simpler and whether they give new information and if so whether the information is trade-able.
This article is not about Market profile, though we will get to that subsequently. It's about the one thing we all look at when we start our trading careers- that is indicators. As a new bie trader ( and we all have been there) we need something to understand the movements of price on the screen. The most common way to see what price is actually doing is to apply a set of indicators on the price pane and a few below. Indeed if you have a moving average in the price pane and any oscillator below, it is enough to undertand the movement of price. I've seen charts used by people where they look at a few indicators on the main pane of price and also have a few panes below.The objective seems to to learn the movement of these indicators than of price itself! 
By definition, an indicator should be something that should provide statistical values giving clues to the condition or direction of the underying.which in the case of all instruments is price.
Broadly speaking the family of indicators can be divided in two parts:
a) Moving average Based
b) Oscillator Based
Most Oscillators employ moving averages, but because of their position in the lower pane, we will treat it separately.
Moving averages :
All moving averages get updated on the following formula :
MA ( CurrentPrice) = MA ( previous bar) + ( Price – MA(prevbar) ) * ( 2/ n+1)
where n is the period considered for the moving average.
Thus the MA depends on Price and period, The price can be considered to be the close or the high or the low of the bar.
The formula shows that if price is moving steadily up ( or down ) , the differential is always positive and it's the simple reason that most moving averages will do well if the market is in the middle of a strong trend whether up or down.
However the problem happens when the market starts going sideways and the MA starts catching up closer to price. Regardless of the period used in this case, the differential is not big enough and the MA ceases to be a good indicator of market direction.
The charts below is the Nifty spot chart from July 2011.
I've divided the chart into three periods bases on the MA employed which in the case of the chart above is the Exponential 10 day.
Also in the chart above you see a customized stochastic indicator in the lower pane ( more on that later)
In the first green rectangle (1) we have price below the 10 EMA and the market is trending down. You need nothing else to tell the direction which is down in this case.
In the third green rectangle ( 3) we have price above the 10 EMA and the market is showing that it is trending up as long as it stays above the EMA.It is important to note in the chart above as well as the formula that price is trending up and MA confirms that to us and we can safely say that there will be no immediate change in market behavior till the price moves below the MA line in which case it will be safe to assume that the market has stopped trending up.
The Oscillator :
The role of the oscillator has been rather poorly defined to call for overbought and oversold conditions. It's main purpose however is to tell us that the market is in a sideways zone. This can be identified if the oscillator starts making sine waves on charts. The oscillator is measured between a -100 to + 100 level generally and it is this scaling which is responsible for the many problems with this indicator.The market does not recognize an oversold or an overbought state if the liquidity is moving price higher or lower. Indeed when liquidity is strong this indicator stops working in other words it becomes in effective.The utility is a lot more when price is rotating around the moving average as we can see in the second rectangle above. In rectangle 1 and 3 it is in the oversold/ overbought stage as the scaling made has undone it's movement lower and higher.
I have modified the code a bit to give signals one or two days before the actual stochastic does.
The modified code is simply –
(SLOWD * 2 ) – 100 for the slowD and
(FASTD * 2 ) – 100 for the fastD
The periods used for the daily chart are 10,3,3.
I've marked in blue in the second rectangle where the stoch gave good signals.As can be seen it was when the MA was in the sideways mode.
Inference : When the Price is above or below the MA and stays there for the period of the MA used, it is wise to follow only the MA to determine the change in direction. However if the oscillator starts forming sine waves in the oscillator pane, then it pays to stop looking at the MA and consider only the stoch.
There are other ways to detremine if the market is trending or moving sideways- we'll have a look at these in subsequent articles.
I'll be happy to hear your feedback on the indicators you employ.