Which are the best technical indicators? What do they do? And how do you apply them successfully in your trading. Find out here …
Traders are often bracketed into two camps: fundamental traders and technical traders. The former focus on news and data, while the later focus on charts. And proponents of each are quick to dismiss the methods of the other camp.
When you’re new to technical analysis, it can seem dubious that lines drawn on your charts have some kind of predictive power … but the reality is that patterns form again and again because of the way in which humans behave.
Technical analysis helps us to make sense of price charts, identifying trends, marking off levels and spotting momentum (or lack of it). Some people can’t get enough of these tools and will litter their charts with them. Others just need a few to help them read price behaviour more clearly. There isn’t a right or wrong here – it’s like some people work best from a messy desk, while others need a clear workspace. Find what works best for you.
Trend: trend indicators are all about direction. Is the market moving up or down? This is how traders decide if they want to go long or short. Or, if there’s a lack of trend, a trader might look for smaller moves within a range.
Momentum: momentum indicators are about measuring the strength of the market. When you’re looking to make an entry, you want to get into the market just as it’s about to accelerate – that way we can make profits quickly, with less risk. Momentum indicators look at the rate at which a market is moving up or down and can be used in a number of different ways.
Volatility: volatility indicators are an important, but often forgotten, piece of the puzzle. When we get into a trade, we want to know how far we should expect the price to move. This enables us to position our stops and targets wisely – maximizing the chance of hitting profit targets, and minimizing the chances of getting stopped out.
•Best Trend Indicators•
•My 4 Best Momentum Indicators•
•My 3 Best Volatility Indicators•
A lagging indicator is one that tells us what’s already happened. A leading indicator warns us that something might be about to happen.
It’s easy to see why traders would be drawn to leading indicators, which can give us a heads-up, and get us into trades nice and early. However, both types of indicators are prone to false signals – with leading indicators giving signals to events that just don’t happen, and lagging indicators telling us too late, when the market has already changed direction.
Most important is to know what type of indicator you’re using. If it’s lagging, like a moving average, you’ll be disappointed if you’re expecting it to give you early warning. If it leading, like a Stochastic, it’ll need a steady hand on the tiller if you’re going to avoid jumping into the market every 5 minutes as it jitters one way and the other.
Ultimately, the best strategies will have a balance of the two.
People will often complain that a technical indicator is unreliable or has given them false signals. Nine times out of ten, it’s because the trader is asking the wrong questions of that indicator.
Indicators are fallible … if we’re expecting a 100% success rate, then you’re in the wrong game. But if you use the right tool for the right job, trading will become much easier (and more profitable).
Here are the jobs we should be assigning our indicators …
You can discover exactly what these tasks are and which indicators are best suited in the posts listed below …
Don’t worry – you don’t need a different technical indicator to do each of these jobs … just make sure you have all these tasks covered. Three indicators can be enough to create a successful strategy, or even fewer if you’re using PRICE ACTION techniques alongside your technical indicators.
The most important part of building a successful technical trading strategy is to test … test … test …
Look through past charts to check how your indicators perform in different market situations. Perhaps they produce great results in a trend, but when the market gets stuck sideways, make sure you don’t start hemorrhaging money.
When you’re happy, start forward testing on a demo account until you’re confident in performance.
And, for a deeper dive into technical analysis, check out all the material HERE.
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