The Secret to Using Technical Indicators

Technical IndicatorsWhat in the world is a “stochastic”? How do people even come up with words like “stochastic”? Me, I can’t even spell “stochastic”.

So, believe it or not, I am actually going to reveal to you – right here, today – the ultimate SECRET to using technical trading indicators. But it’s not what you think. So, pay attention.

Which technical indicators work the best? The simple truth is…all of them. All right, just stay with me here and I’ll explain something quite a bit more useful than that basic fact. It is, however, a fact. Every single technical indicator ever created made money for the guy who created it – which is why he publicized it, and why we know about it, and why it’s available for download somewhere. Welles Wilder became famous for developing the RSI (relative strength index), and used it very profitably (that’s why he’s considered a “market wizard”). Me, I can’t make a dime using the RSI. I have occasionally loaded his Parabolic SAR on my charts, but it’s never been more than a pretty little line of dots decorating the chart. I’m not trying to bash Welles (cool name, huh?), nor his indicators. I’m simply making the point that they haven’t been particularly helpful for ME. Which brings me to my overall point:

That’s the secret: They all work for somebody, but you have to find the ones that YOU are comfortable using and that work profitably for you. And now, just because I’m such a nice guy, I’m going to do my best to help you accomplish that task. It’s really not that difficult – you can do this.

Experiment. You’ve probably already got some sort of basic technical trading strategy that you stumbled across one place or another. Great! Now, simply try adding one or two additional indicators, and see if they help (or hurt) your trading. I wouldn’t try out more than one or two at a time – you don’t want to clutter up your charts with too many indicators, as all that will do is distract and confuse you. If you have too many indicators loaded at the same time, they’re almost certain to give conflicting signals – your RSI says sell, your ADX says buy; your moving averages say buy, your Bollinger Bands say sell. Myself, I have a whopping total of 6 indicators on my basic trading chart, and 4 of those are moving averages, so that means I only have three different types of indicators.

When you’re trying out various indicators, give them a fair test – use them for at least 2 or 3 weeks, and do things like trying them out on different time frames. Something that doesn’t seem very useful on a 15 minute chart may work like a charm on a 4 hour or daily chart. Try out different versions of various indicators. There are several variations of, for example, the MACD and the ADX. I personally use the “Hull Style ADX”. Is it head and shoulders above every other version of the ADX? – No, it’s just the one that works best for me.

That’s how simple it really is – try things out and discover the ones that you’re comfortable using, the ones that work for you and your style of trading. That’s the secret. I know there are plenty of traders out there who do very well using indicators that I never use – I also know that I do pretty well using indicators that they don’t use. There are a number of factors that determine the differences – what time frame one trades, one’s general trading purpose and goals (for example, long term investing vs. making a day to day living), and again, simply the different personalities we each have. What’s of critical importance is your personal trading style and how various indicators either work with it, or don’t.

I urge you to test things out on an ongoing basis (I usually have at least one indicator loaded that I’m just looking at, considering, but that’s not currently an active tool in my trading arsenal – and I’ve been trading for several years). You never know when you may find the one indicator that helps you boost your trading performance to a whole new level. Make sure you’re aware of the general type of an indicator – it’s likely more helpful to have one trend type indicator and one momentum type indicator, rather than using two trend indicators. Again, I caution against using too many indicators. A pile of indicators creates a pile of confusion. I’ve been successful trading 4 hour charts using nothing more than two moving averages and one momentum indicator.

In sum, the “secret” is that the indicators aren’t the key. The key is your personal trading style and what works for you. So just try out different indicators to find the perfect ones for helping you become a more successful trader. Hey, that’s the whole secret to trading – finding the things that work for you and your style of trading. You can do it!

As always, I wish you all the success in the world and these are just my thoughts and opinions (they could be wrong…but come on, when has that ever happened?).

This article was written by:  +Jack Maverick  a writer and active currency trader. Check out his novel, the psychological thriller “A Cross of Hearts

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