What is the difference between an indicator and a strategy?
Indicators, such as MACD and stochastic, are used in technical analysis to predict changes in price trends and patterns. The goal of using indicators is to define high probability trading setups. Indicators are mathematical calculations used to highlight what has already happened and what is currently happening to allow us to make an educated guess about what will happen next. For instance, a moving average crossover often predicts a change in price trend. In short, indicators help us determine areas of price that could be profitable entry and exit points in our trades.
Strategies may also utilize the calculations of indicators to create a defined set of rules for trade entries and exits. Strategies, however, outline exactly how we are going to use the indicators. For instance, a moving average crossover can predict a change in price trend. But how exactly do we quantify that? A strategy would state that: the system should use a market order to buy 500 shares on the first price bar where the 50-period simple moving average (SMA) crosses above the 200-period SMA. The indicator finds the ideal setups; the strategy plucks information from the indicator(s), establishes a position size and specifies an order type, then pulls the trigger.
When you use a publicly available indicator or purchase a proprietary indicator, you have a tool that will help you make trading decisions. The indicators themselves do not create entry or exit signals. You will need to do your homework (research, backtest, paper trade, etc) to determine how to use the indicator(s) effectively in your own trading.
When you use a strategy, a set of rules defines how any indicators are used to define trade entries and exits. Because strategies are necessarily objective, backtesting can show the expectancy results.
