What Technical Indicators Cannot Tell You

We display technical indicators on every stock page. We also think most people misread them badly. Both things are true, and this piece is the second one.

The one fact that reframes everything

Every technical indicator is a function of past price. That is not a criticism — it is a definition. RSI, MACD, ADX and moving averages take price history in and put a transformed number out.

The consequence follows immediately: an indicator cannot contain information the price history does not already contain. It is a re-presentation. Useful, because humans read charts poorly and summaries help. But no indicator knows a company won a contract, lost a lawsuit, or is about to report bad numbers.

So when a stock gaps 15% on news, no indicator "missed" it. They cannot see news. They only saw the aftermath.

"Overbought" does not mean sell

The most expensive misunderstanding in retail investing.

RSI above 70 gets called overbought. The word implies "too high, due a fall." It means nothing of the sort. It means recent gains have been large relative to recent losses. That is all it means.

In a strong uptrend RSI can stay above 70 for weeks. Stocks in the middle of major re-ratings are overbought the entire way up. Selling because a line crossed 70 has taken people out of their best positions early, repeatedly, for decades.

The mirror error is worse: buying because RSI dropped below 30. A collapsing company is oversold all the way to zero. "Oversold" is not a floor.

Indicators lag, by construction

MACD is built from moving averages. Moving averages are backward-looking by definition — averages of what already happened. So MACD tells you a trend changed after it changed.

Sometimes that is fine; confirmation has value. But do not confuse a lagging confirmation with a prediction. By the time the histogram flips, the move is underway and part of it is gone.

They fail hardest in sideways markets

Trend indicators need a trend. Without one they whipsaw — signal, reverse, signal, reverse — and each false signal costs commission and tax.

This matters especially on the PSX, which spends long stretches range-bound on thin volume. A strategy backtested through a trending stretch can look excellent and then bleed for a year when the market goes quiet.

ADX is the honest counterweight: below roughly 20, treat trend signals as noise. The most valuable output of a technical toolkit is often "there is nothing here."

Thin volume breaks them

Indicators assume the price series means something — that it reflects many participants continuously repricing.

For a PSX small cap trading a few thousand shares a day, that assumption fails. A handful of trades sets the close. RSI computed on that series is arithmetically valid and informationally empty. It measures the behaviour of three people.

Before reading any indicator, look at volume. If it is thin, the indicator is describing noise with a decimal point.

Circuit breakers distort the series

PSX price caps mean the close is sometimes not a real clearing price — it is the boundary. A stock locked at upper circuit did not "close at" that price in the sense the indicator assumes; there were buyers with nothing available.

Feed a circuit-locked series into any indicator and the output is a number computed from a constraint, not from supply and demand. Every indicator on this site inherits that flaw, including our model's inputs.

Backtests lie, gently

Any strategy can be made to look good on history, because the rules were chosen knowing what happened. Try enough parameter combinations and something fits beautifully — and describes the noise, not a pattern.

This is overfitting, and it is the main reason promising strategies disappoint in live use. When you see "this system returned 340% backtested", the correct reaction is not interest. It is asking how many variants were tried before that one was shown to you.

We apply this to ourselves. Our model performance page reports out-of-sample accuracy — how the model did on data it had never seen. It is a less impressive number than a backtest. It is the only one that means anything.

So why show them at all?

Because used narrowly they earn their place:

• Summarising. "Above a rising 50-day average on strong volume" compresses a chart honestly.
• Divergence. Price up, momentum not — a genuine question worth asking.
• Regime detection. ADX telling you there is no trend is real information.
• Discipline. Pre-committed rules beat improvising while your money moves.

What they cannot do is tell you what a business is worth. That question is answered by understanding the company — its earnings, its debt, its industry, its management. No oscillator substitutes for it.

Indicators describe the crowd's recent behaviour. Sometimes that is worth knowing. It is never the whole story, and on a market as thin and as policy-driven as Pakistan's, it is a smaller part of the story than the charts suggest.