Market Indicator

The stock market performs at a fast pace which usually requires fast response and decision-making.

Author: Adin Lykken
Adin Lykken
Adin Lykken
Consulting | Private Equity

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

Reviewed By: Andy Yan
Andy Yan
Andy Yan
Investment Banking | Corporate Development

Before deciding to pursue his MBA, Andy previously spent two years at Credit Suisse in Investment Banking, primarily working on M&A and IPO transactions. Prior to joining Credit Suisse, Andy was a Business Analyst Intern for Capital One and worked as an associate for Cambridge Realty Capital Companies.

Andy graduated from University of Chicago with a Bachelor of Arts in Economics and Statistics and is currently an MBA candidate at The University of Chicago Booth School of Business with a concentration in Analytical Finance.

Last Updated:November 16, 2023

What is a Market Indicator?

The stock market performs quickly, which usually requires quick response and decision-making. However, these decisions, which are made daily, cannot be made without some information or facts to ensure the desired outcome from these decisions.

In addition to the need for a quick decision-making approach is the ability to read and analyze the continuously changing figures and percentages of the stock market securities, assets, commodities, and so on. How to interpret this information displayed without taking too much time?

Unified tools and their availability means a fair game for everyone. If the tools provided to read the stock market are not cooperative, or some tools are only available for a specific segment of traders or investors, then it wouldn't be fair for other parties involved in the financial market.

The stock market, throughout the years, has managed to equip itself with tools to allow parties engaging with it to analyze it, understand it, and predict it sometimes when the overall economic performance is stable. These tools have existed for some time, and others have been introduced recently.

These tools are called market indicators. They allow traders and investors to predict the market and make decisions accordingly. They vary in number and approach, and hence, different tools can provide other assistance in decision-making. 

Understanding Market Indicators

They are tools used to analyze quantitative factors that affect the markets and enable users to monitor market changes while operating. It also allows users to predict or have a market forecast. They are partially technical analysis tools that consist of formulas and ratios.

Quantitative in nature means that these tools collect, store and analyze numbers at a fast pace. These numbers could be current numbers produced by the market or historical numbers produced on previous demand operating days. The historical and current numbers can collectively allow forecasting.

These indicators rely on formulas and ratios, meaning they are complex mathematical formulas and percentages in the core of the hands that allow them to display output that the user could use to interpret or forecast.

These formulas existed way before the stock market; only their application was different.

To arrive at a conclusion, market and technical indicators apply a statistical formula to a set of data points.

The distinction is that market indicators draw their data from various securities instead of just one. As a result, they frequently show on their chart rather than above or below an index price chart.

Technical indicators are regarded as a subset of market indicators, yet there are important distinctions between the two.

Similar to technical indicators, market indicators are derived by applying statistical algorithms to data points to produce ratios or formulas.

Market Indicators Types

A market indicator may use information gathered from various securities traded on a specific market or from a portion of an index.

It is typically plotted on distinct charts and graphs, whereas technical indicators are usually displayed at the bottom of an index price chart.

Most stock market indicators are developed by examining the market breadth, or the ratio of businesses making new highs to new lows, as it indicates the direction of the general trend.

1. Market breadth

Market breadth indicators examine the information from many stocks with relative price movements. It enables traders to predict the direction of the trend in the near term.

In a given trading period, the number of firms that set new highs and the number of stocks that do the same will be compared.

The market width is helpful for trend traders because they can make money by betting on market trends in price fluctuations.

If the indicators utilized are reliable and risk is appropriately accounted for, trends are thought to be generally low-risk. Trading psychology, which might result in unpredictable market price swings, is not considered by trends.

For instance, the advance-decline line is a ratio that compares the proportion of companies in an index that are positively advancing to those that are declining.

The indicator is helpful because it considers the weight of a particular business's market capitalization when determining the trajectory of price fluctuations rather than just taking into account the price movements of the stock of the largest firm in that index.

Examples frequently used are $NYAD and $NAAD.

2. Market sentiment

Indicators of market mood are used to compare a security's price to the volume of transactions it receives. In addition, it is carried out to ascertain whether investors are bullish or bearish on the market.

For instance, the put-call ratio determines how many call options were purchased over how many put options during a specified period.

3. Moving average

Since moving averages "smooth" out the available price data, they help remove unnecessary data points. So it is because a moving average represents a particular asset's average price over time as a single flowing line.

The trader can choose the time frame at their discretion and according to their priorities. For instance, investors and long-term trend followers will typically take a timeframe of 50, 100, or 200 days into account. On the other hand, a week-long timeframe is a possibility for short-term traders.

The moving average can reveal several characteristics of a particular security's trajectory. For example, the slope's angle may show the trendline.

A positively sloped moving average indicates that the security price is expected to increase, whereas a horizontal moving average indicates that the cost of the security varies.

Moving averages merely display actual price changes that have already occurred; they do not anticipate future price movements. The following are some examples: $NYA50, $NYA200, $NAA50, and $NAA200.

4. On-balance volume

A key market indicator is trade volume, and on-balance volume combines a variety of volume-related data into a single flowing line. OBV verifies patterns rather than forecasting price changes.

A rising OBV indicates that the security's price is increasing, whereas a falling OBV corresponds to declining price movements.

The price movement will likely alter course if the OBV and price go in opposing directions. For example, a rising OBV and a declining price indicate that a price increase may be imminent. However, the price gets close to a bottom when it decreases, and the OBV is flatlining.

market indicators use

Different indicators have other uses and results. Based on their functionality, they provide users with relevant outcomes to their desired forecasting or indications.

Each indicator is used in a specific context; hence a thorough understanding of these indicators is suggested before utilization:

1. Advance-Decline (AD)

The Advance-Decline (AD) line is one of the most prominent and often-used market breadth indicators.

We examine the number of securities that saw their prices rise or those that advanced and the number of securities that saw their prices fall or decline for a particular market or index.

The Net Advance distinguishes the two and reveals whether investors have been buying or selling during the chosen period.

Investors have been buying if the Net Advance is positive and vice versa. Investors buy when they anticipate a future increase in the value of the stocks or when they are bullish, and vice versa.

The AD Line is obtained by plotting the Net advancements. AD Line is a cumulative figure, meaning that the end-of-period value is calculated by adding the value of the current period's Net Advance to the value of the prior period.

This indication has one flaw, though. For indices that undergo routine inclusion and exclusion

The AD Line and the index may not always agree on the price of securities, such as NASDAQ, because the index eliminates the effect of the delisted stock, but the AD line does not. Similar to the AD line, the AD Volume Line analyzes the Net Advance in Volume rather than Price.

2. Put-call ratio

It is a measure of sentiment determined by the proportion of put volume to call volume.

Purchasing more put options shows that investors believe that the prices of the securities will decline shortly while buying more call options shows that they think the opposite.

Determining the Put Call Ratio: is more significant than 1, we may infer that the investing community is more bearish than bullish, and vice versa when it is less than 1. This signal is occasionally applied to contrarian investing.

Because as more and more put options are purchased, the price of the underlying asset may decline unreasonably, inflating the risk associated with it. Call options are the exact opposite. As a result, each analyst has a different perspective on how sentiment indicators should be interpreted.


We learn from the meaning of market indicators, types, use, and importance that they can assist users in understanding market trends and volatility through a better approach; moreover it helps in forecasting the upcoming trend of a specific market at a specific period.

Traders and investors use stock market indicators, which are essentially quantitative tools, to understand financial data. The general goal is to predict stock market fluctuations and benefit from them.

Market indicators are mostly quantitative in a subset of technical indicators like ROC or stochastics. Stock market indicators are primarily used to gauge the market mood and include essential metrics, including market sentiment, on-balance volume, moving averages, and market breadth.

As stock market indicators, you can use specifics like the advance/decline ratio, the 52-week high/low ratio, the upper/lower circuit ratio, the delivery ratio, etc.. Of course, the complete list of precise stock market indicators is endless, but the point is that this is a general principle.

Researched and authored by Ahmed Fagiry | LinkedIn

Reviewed and edited by Sakshi Uradi | LinkedIn

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