Education

Trading Ideas: Indicators, help or lose?

By  | 

It is a classic desire among traders to find a package of technical indicators that provides them with the ultimate system to be a winning trader simply simply by following what the indicators tell them in a systemized and (ideally) automated fashion.

In fact, it would be great to find a winning system that consistently followed such tight rules such as: “enter in favor of the trend with the first green or red candle once the means of 10 and 20 periods cross.” But if that is the trading you intend to look for, you’ll go broke trying to look for it. No system is perfect.

I will not say that someone who engages in trading from the point of view of technical analysis, as is often the case in most intraday traders, should completely ignore the indicators. What I am saying is that we must be very clear that these indicators can not be interpreted beyond what they are: a statistical indication calculated on the past action of the price. Making future decisions based on past performance…well, you know the old saying.

The natural tendency of a trader is to start using a multitude of indicators totally disproportionately. I myself have gone through stages in which the action of the price was absolutely hidden after stochastics, divergences and parabolic analysis. And I can assure you that that does not work.

Why does not it work? Because as you introduce a new indicator, you increase the chances of finding any of them that discourage entry into a particular trade. At the moment you have 10 indicators on the screen, you will always find some that reinforce the subjectivity of your opinion about whether or not to enter into a trade, and that can be dangerous in the learning stage.

However, I think that stage in which you test countless indicators and you are making mistakes is absolutely essential in the learning of any trader. The advice of most traders who trade regularly are consistent in this regard: simplify the use of indicators, or even forget about them altogether. I say exactly the same, but I go a little further, and I advise you to come to that conclusion from your own experience, because it is the best way to consolidate knowledge: use as many indicators as you can, and you will see the need to simplify will become evident over time.

In the end, you must find a trading system that does not require you to be slave to any single indicator(s). If you are not able to take trades simply with 1 or 2 indicators, and you need 5 or 6 to enter or exit an trade, you are probably doing something wrong.

To this day, and depending on the market I’m trading, I rely mostly on volume indicators to help me determine my trades. With that and the price action itself, I have more than enough. Of course, I consider it important to mark relevant levels (supports, resistances and peak volume points) and always take into consideration the market trend.

But in any case, the indicators I use are always elementary; no complex signs that hide an indecipherable mathematical formula and do not have an obvious translation as far as market behavior is concerned.

If you give me an indicator that turns red when I have to sell and green when I have to buy, just like that, I will not want it at all. Can it work? Sure, for a while. But the experience tells me that it will stop working at some point, and not only will you not know why, but you will also return to the point where you can not trade without it, and that is the worst thing that can happen if you want to be a real trader.

Leave a Reply

Your email address will not be published. Required fields are marked *