diff --git a/app/models/user_option.rb b/app/models/user_option.rb
index 70d80d80522..06eebd364f7 100644
--- a/app/models/user_option.rb
+++ b/app/models/user_option.rb
@@ -292,6 +292,7 @@ end
 #  enable_experimental_sidebar          :boolean          default(FALSE)
 #  seen_popups                          :integer          is an Array
 #  sidebar_list_destination             :integer          default("none_selected"), not null
+#  chat_header_indicator_preference     :integer          default(0), not null
 #
 # Indexes
 #
diff --git a/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.hbs b/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.hbs
index 06da5981c31..93c6e38793a 100644
--- a/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.hbs
+++ b/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.hbs
@@ -1,9 +1,9 @@
-{{#if (gt this.chatChannelsManager.unreadUrgentCount 0)}}
+{{#if this.showUrgentIndicator}}
   <div class="chat-channel-unread-indicator urgent">
     <div class="number-wrap">
       <div class="number">{{this.chatChannelsManager.unreadUrgentCount}}</div>
     </div>
   </div>
-{{else if (gt this.chatChannelsManager.unreadCount 0)}}
+{{else if this.showUnreadIndicator}}
   <div class="chat-channel-unread-indicator"></div>
 {{/if}}
\ No newline at end of file
diff --git a/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.js b/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.js
index df39429e489..61410f92562 100644
--- a/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.js
+++ b/plugins/chat/assets/javascripts/discourse/components/chat-header-icon-unread-indicator.js
@@ -1,6 +1,44 @@
 import { inject as service } from "@ember/service";
 import Component from "@glimmer/component";
+import {
+  HEADER_INDICATOR_PREFERENCE_ALL_NEW,
+  HEADER_INDICATOR_PREFERENCE_DM_AND_MENTIONS,
+  HEADER_INDICATOR_PREFERENCE_NEVER,
+} from "../controllers/preferences-chat";
 
 export default class ChatHeaderIconUnreadIndicator extends Component {
   @service chatChannelsManager;
+  @service currentUser;
+
+  get showUrgentIndicator() {
+    return (
+      this.chatChannelsManager.unreadUrgentCount > 0 &&
+      this.#hasAnyIndicatorPreference([
+        HEADER_INDICATOR_PREFERENCE_ALL_NEW,
+        HEADER_INDICATOR_PREFERENCE_DM_AND_MENTIONS,
+      ])
+    );
+  }
+
+  get showUnreadIndicator() {
+    return (
+      this.chatChannelsManager.unreadCount > 0 &&
+      this.#hasAnyIndicatorPreference([HEADER_INDICATOR_PREFERENCE_ALL_NEW])
+    );
+  }
+
+  get indicatorPreference() {
+    return this.currentUser.user_option.chat_header_indicator_preference;
+  }
+
+  #hasAnyIndicatorPreference(preferences) {
+    if (
+      !this.currentUser ||
+      this.indicatorPreference === HEADER_INDICATOR_PREFERENCE_NEVER
+    ) {
+      return false;
+    }
+
+    return preferences.includes(this.indicatorPreference);
+  }
 }
diff --git a/plugins/chat/assets/javascripts/discourse/controllers/preferences-chat.js b/plugins/chat/assets/javascripts/discourse/controllers/preferences-chat.js
index 5774f44b4b5..b5e346b62c4 100644
--- a/plugins/chat/assets/javascripts/discourse/controllers/preferences-chat.js
+++ b/plugins/chat/assets/javascripts/discourse/controllers/preferences-chat.js
@@ -13,18 +13,39 @@ const CHAT_ATTRS = [
   "ignore_channel_wide_mention",
   "chat_sound",
   "chat_email_frequency",
+  "chat_header_indicator_preference",
 ];
 
+export const HEADER_INDICATOR_PREFERENCE_NEVER = "never";
+export const HEADER_INDICATOR_PREFERENCE_DM_AND_MENTIONS = "dm_and_mentions";
+export const HEADER_INDICATOR_PREFERENCE_ALL_NEW = "all_new";
+
 const EMAIL_FREQUENCY_OPTIONS = [
   { name: I18n.t(`chat.email_frequency.never`), value: "never" },
   { name: I18n.t(`chat.email_frequency.when_away`), value: "when_away" },
 ];
 
+const HEADER_INDICATOR_OPTIONS = [
+  {
+    name: I18n.t(`chat.header_indicator_preference.all_new`),
+    value: HEADER_INDICATOR_PREFERENCE_ALL_NEW,
+  },
+  {
+    name: I18n.t(`chat.header_indicator_preference.dm_and_mentions`),
+    value: HEADER_INDICATOR_PREFERENCE_DM_AND_MENTIONS,
+  },
+  {
+    name: I18n.t(`chat.header_indicator_preference.never`),
+    value: HEADER_INDICATOR_PREFERENCE_NEVER,
+  },
+];
+
 export default class PreferencesChatController extends Controller {
   @service chatAudioManager;
   subpageTitle = I18n.t("chat.admin.title");
 
   emailFrequencyOptions = EMAIL_FREQUENCY_OPTIONS;
+  headerIndicatorOptions = HEADER_INDICATOR_OPTIONS;
 
   @discourseComputed
   chatSounds() {
diff --git a/plugins/chat/assets/javascripts/discourse/initializers/chat-user-options.js b/plugins/chat/assets/javascripts/discourse/initializers/chat-user-options.js
index e7b9af19561..c410763d713 100644
--- a/plugins/chat/assets/javascripts/discourse/initializers/chat-user-options.js
+++ b/plugins/chat/assets/javascripts/discourse/initializers/chat-user-options.js
@@ -5,6 +5,7 @@ const ONLY_CHAT_PUSH_NOTIFICATIONS_FIELD = "only_chat_push_notifications";
 const IGNORE_CHANNEL_WIDE_MENTION = "ignore_channel_wide_mention";
 const CHAT_SOUND = "chat_sound";
 const CHAT_EMAIL_FREQUENCY = "chat_email_frequency";
+const CHAT_HEADER_INDICATOR_PREFERENCE = "chat_header_indicator_preference";
 
 export default {
   name: "chat-user-options",
@@ -18,6 +19,7 @@ export default {
         api.addSaveableUserOptionField(IGNORE_CHANNEL_WIDE_MENTION);
         api.addSaveableUserOptionField(CHAT_SOUND);
         api.addSaveableUserOptionField(CHAT_EMAIL_FREQUENCY);
+        api.addSaveableUserOptionField(CHAT_HEADER_INDICATOR_PREFERENCE);
       }
     });
   },
diff --git a/plugins/chat/assets/javascripts/discourse/templates/preferences/chat.hbs b/plugins/chat/assets/javascripts/discourse/templates/preferences/chat.hbs
index a2e2d00cc37..740c22da1f1 100644
--- a/plugins/chat/assets/javascripts/discourse/templates/preferences/chat.hbs
+++ b/plugins/chat/assets/javascripts/discourse/templates/preferences/chat.hbs
@@ -69,6 +69,21 @@
   {{/if}}
 </div>
 
+<div class="control-group chat-setting controls-dropdown">
+  <label for="user_chat_header_indicator_preference">
+    {{i18n "chat.header_indicator_preference.title"}}
+  </label>
+  <ComboBox
+    @valueProperty="value"
+    @content={{this.headerIndicatorOptions}}
+    @value={{this.model.user_option.chat_header_indicator_preference}}
+    @id="user_chat_header_indicator_preference"
+    @onChange={{action
+      (mut this.model.user_option.chat_header_indicator_preference)
+    }}
+  />
+</div>
+
 <SaveControls
   @id="user_chat_preference_save"
   @model={{this.model}}
diff --git a/plugins/chat/config/locales/client.en.yml b/plugins/chat/config/locales/client.en.yml
index d3d47e6f853..af2a3c06436 100644
--- a/plugins/chat/config/locales/client.en.yml
+++ b/plugins/chat/config/locales/client.en.yml
@@ -94,6 +94,11 @@ en:
         never: "Never"
         title: "Email Notifications"
         when_away: "Only when away"
+      header_indicator_preference:
+        title: "Show activity indicator in header"
+        all_new: "All New Messages"
+        dm_and_mentions: "Direct Messages and Mentions"
+        never: "Never"
       enable: "Enable chat"
       flag: "Flag"
       emoji: "Insert emoji"
diff --git a/plugins/chat/db/migrate/20230228062442_add_chat_header_indicator_preference.rb b/plugins/chat/db/migrate/20230228062442_add_chat_header_indicator_preference.rb
new file mode 100644
index 00000000000..e6b5d7c38cb
--- /dev/null
+++ b/plugins/chat/db/migrate/20230228062442_add_chat_header_indicator_preference.rb
@@ -0,0 +1,7 @@
+# frozen_string_literal: true
+
+class AddChatHeaderIndicatorPreference < ActiveRecord::Migration[7.0]
+  def change
+    add_column :user_options, :chat_header_indicator_preference, :integer, default: 0, null: false
+  end
+end
diff --git a/plugins/chat/lib/extensions/user_option_extension.rb b/plugins/chat/lib/extensions/user_option_extension.rb
index ae2993a216f..467f1a84a67 100644
--- a/plugins/chat/lib/extensions/user_option_extension.rb
+++ b/plugins/chat/lib/extensions/user_option_extension.rb
@@ -13,6 +13,11 @@ module Chat::UserOptionExtension
       @chat_email_frequencies ||= { never: 0, when_away: 1 }
     end
 
+    def base.chat_header_indicator_preferences
+      @chat_header_indicator_preferences ||= { all_new: 0, dm_and_mentions: 1, never: 2 }
+    end
+
     base.enum :chat_email_frequency, base.chat_email_frequencies, prefix: "send_chat_email"
+    base.enum :chat_header_indicator_preference, base.chat_header_indicator_preferences
   end
 end
diff --git a/plugins/chat/plugin.rb b/plugins/chat/plugin.rb
index 6a1a618943c..d14913e05b3 100644
--- a/plugins/chat/plugin.rb
+++ b/plugins/chat/plugin.rb
@@ -264,6 +264,7 @@ after_initialize do
   UserUpdater::OPTION_ATTR.push(:chat_sound)
   UserUpdater::OPTION_ATTR.push(:ignore_channel_wide_mention)
   UserUpdater::OPTION_ATTR.push(:chat_email_frequency)
+  UserUpdater::OPTION_ATTR.push(:chat_header_indicator_preference)
 
   register_reviewable_type ReviewableChatMessage
 
@@ -475,6 +476,14 @@ after_initialize do
 
   add_to_serializer(:user_option, :chat_email_frequency) { object.chat_email_frequency }
 
+  add_to_serializer(:user_option, :chat_header_indicator_preference) do
+    object.chat_header_indicator_preference
+  end
+
+  add_to_serializer(:current_user_option, :chat_header_indicator_preference) do
+    object.chat_header_indicator_preference
+  end
+
   RETENTION_SETTINGS_TO_USER_OPTION_FIELDS = {
     chat_channel_retention_days: :dismissed_channel_retention_reminder,
     chat_dm_retention_days: :dismissed_dm_retention_reminder,
diff --git a/plugins/chat/spec/system/message_notifications_with_sidebar_spec.rb b/plugins/chat/spec/system/message_notifications_with_sidebar_spec.rb
index b12d23da0f2..883701896ca 100644
--- a/plugins/chat/spec/system/message_notifications_with_sidebar_spec.rb
+++ b/plugins/chat/spec/system/message_notifications_with_sidebar_spec.rb
@@ -79,6 +79,60 @@ RSpec.describe "Message notifications - with sidebar", type: :system, js: true d
             end
           end
 
+          context "when user chat_header_indicator_preference is set to 'never'" do
+            before do
+              current_user.user_option.update!(
+                chat_header_indicator_preference:
+                  UserOption.chat_header_indicator_preferences[:never],
+              )
+            end
+
+            context "when a message is created" do
+              it "doesn't show any indicator on chat-header-icon" do
+                visit("/")
+                using_session(:user_1) { create_message(channel: channel_1, creator: user_1) }
+
+                expect(page).to have_no_css(".chat-header-icon .chat-channel-unread-indicator")
+              end
+            end
+          end
+
+          context "when user chat_header_indicator_preference is set to 'dm_and_mentions'" do
+            before do
+              current_user.user_option.update!(
+                chat_header_indicator_preference:
+                  UserOption.chat_header_indicator_preferences[:dm_and_mentions],
+              )
+            end
+
+            context "when a message is created" do
+              it "doesn't show any indicator on chat-header-icon" do
+                visit("/")
+                using_session(:user_1) { create_message(channel: channel_1, creator: user_1) }
+
+                expect(page).to have_no_css(
+                  ".chat-header-icon .chat-channel-unread-indicator.urgent",
+                )
+              end
+            end
+
+            context "when a message with a mention is created" do
+              it "does show an indicator on chat-header-icon" do
+                Jobs.run_immediately!
+
+                visit("/")
+                using_session(:user_1) do
+                  create_message(
+                    text: "hey what's going on @#{current_user.username}?",
+                    channel: channel_1,
+                    creator: user_1,
+                  )
+                end
+                expect(page).to have_css(".chat-header-icon .chat-channel-unread-indicator.urgent")
+              end
+            end
+          end
+
           context "when a message is created" do
             it "correctly renders notifications" do
               visit("/")
diff --git a/plugins/chat/spec/system/user_chat_preferences_spec.rb b/plugins/chat/spec/system/user_chat_preferences_spec.rb
index 70adf38e6f6..9598271c645 100644
--- a/plugins/chat/spec/system/user_chat_preferences_spec.rb
+++ b/plugins/chat/spec/system/user_chat_preferences_spec.rb
@@ -32,6 +32,17 @@ RSpec.describe "User chat preferences", type: :system, js: true do
     expect(page).to have_css("#user_chat_sounds .select-kit-header[data-value='bell']")
   end
 
+  it "can select header_indicator_preference" do
+    visit("/u/#{current_user.username}/preferences/chat")
+    find("#user_chat_header_indicator_preference .select-kit-header[data-value]").click
+    find("[data-value='dm_and_mentions']").click
+    find(".save-changes").click
+
+    expect(page).to have_css(
+      "#user_chat_header_indicator_preference .select-kit-header[data-value='dm_and_mentions']",
+    )
+  end
+
   context "as an admin on another user's preferences" do
     fab!(:current_user) { Fabricate(:admin) }
     fab!(:user_1) { Fabricate(:user) }