Which Technical Indicators To Use?
In my opinion one of the biggest obstacles facing any new trader is the sheer number of different indicators and strategies out there
that can be used to trade. So right out the gate I wish to give you this advice:
Start by using strategies and trading signals that requires minimal interpretation and/or user discretion
My Dad The Trader
Mainstream media and many financial educators will have you believe that you need to master numerous trading styles and
techniques in order to be a successful trader. Their argument being that the markets can be all over the place, and they would want to prepare you to be able to apply all these various strategies to the various possible states the markets finds itself in at times.
This is a very intimidating thought to say the least!
No wonder many traders find themselves in a constant state of trading inertia, not knowing what to do next, or which technique to apply to any given market condition.
The good news however is that this statement is not entirely correct nor even necessary. You see, the age old saying that “if all you have in your tool box is a hammer, then all your problems will look like nails” does not really apply to the market, it would,… if we only had one market to trade.
In our case the reality is that you can choose from a number of markets to trade, whether it is forex, stocks, bonds, commodities, or even an index such as the NASDAQ or CAC40. To go even further, each of these markets has an endless amount of individual securities to choose from.
A few examples are:
- Forex – EUR, CAD, GBP, CHF, AUD, JPY
- Commodities – Crude, Maize, Wheat
- Stocks – Microsoft, FaceBook, Volkswagen, Samsung
- Bonds – US Treasuries, Municipal Bonds
- This list can go on and on and on….
Master A Few Techniques First
I personally prefer to introduce someone to trading by having them master a few techniques or indicators only, this implies a thorough understanding of “WHEN” to use these indicators, in other words, the most ideal market conditions required.
Then, with a watch list of only a relative few instruments or securities across various markets, the easiest thing on earth to do is to scan each item on the watchlist list regularly to see if they fit any of the trading conditions required by one of your techniques or indicators for a possible trade setup.
Once narrowed down and a possible trade exists, then perhaps only a few small final tweaks and checks and balances to complete and off you go,… ready to trade.
Why this technique is so successful amongst traders is that it assists you to cut through all the noise and intimidation. All of a sudden you are busy analysing only a hand full of possible trades and even better yet, you know exactly what to do and more importantly, how to enter and exit the trade if one exists.
The takeaway message here is that once you have a few strategies that you are comfortable in trading, you only need to trade when the market conditions exists, if not either look for another security (like moving from the EUR to CAD), or simply just wait …
Different Market Conditions
Broadly defined the market in general (and generally any security or instrument within a market) constantly moves between the following three states:
- Trending Up
- Trending Down
What confuses novice traders in particular, is that even within an overall upward trending market for example there could be periods of neutral (range bound) or even downward trending price action.
So trying to figure out every single market price action movement and trying to catch this “constantly falling piano” is at best left to those who prefer such complexity.
I will also be the first to admit that depending on the type of trader you are, your ability to move between indicators and markets become may be more prominent in some cases.
The good news however is, the fact that you are reading this will make life a bit easier for you. The trading strategies I will show you here will all predominantly be based on only a few key concepts, used on a balanced portfolio approach and summed up as follows:
OUR IDEAL TRADING STYLE = “LONG TERM POSITIONING” + “MEDIUM TERM OPPORTUNISTIC TRADES” + “BANKING REGULAR SHORT-TERM SETUPS” + “OVERLAYED WITH SOME YIELD ENHANCED STRUCTURING”
I know it sounds extremely complicated and just looking at that equation is intimidating enough, but trust me, .. you’ll see that it really is not.
The reason being that once you have defined only a few signals within each one of these categories the entire process becomes somewhat automated. In fact, in less than 30 minutes a night you would be able to identify all the possible trade setups available. In the end, the result of all of the components of our Ideal Trading Style aims to positions you to:
- Catch Major Trends
- Monetize interim break-out movements within this Major Trend
- Trade very specific and narrowly defined trade set-ups (which is not dictated by the market’s trend, even though you can skew your trade in that direction if it had a clear trend)
- Bank some yield-enhancement trades skewed in favor of the trend via the creation of very specific (and easily defined) option
Start at your Desired Outcome and work your way back
So, we will choose the type of trading we wish to do first and only then map this to the various indicators we need to master in order to trade.
Wouldn’t you agree that this is by far the easiest way to go about it compared to learning hundreds of different strategies and trying to apply them at various times.
This will become clearer later as we go, so for now just understand that our method or trading strategy will not necessarily change depending on the market, but instead, we will only pick markets to trade once they fit into the conditions of our trading strategy.
What is the function of any strategy or trade signal anyway?
- Realize that in the end, all strategies regardless of their technical complexity aims to do one of three things:
- To identify a trend or a possible change in a trend
- To identify when a market is considered range bound, and possible changes in this range
- To Identify positions to take when the market breaks out of an existing range or trend
By now you should agree with me when I say that, especially when just starting out, the best gift you can give yourself is to use trading signals or strategies that requires minimal interpretation. In other words, the easier you can make it on yourself to not have to interpret the indicator to better.
How to choose the indicators that suits you best
The choice of indicator is very dependent on your style, and for the most part your frequency of trading.
I highly recommend you read my post on How to choose the right indicators which will help you a lot in determining which type of indicator suits your personal style of trading best. In this post I also highlight the ones we will be focusing on most often, in short – a great place to start to assist you in your choice.
In the post I cover the following:
- For very active (high frequency) traders, price action viewed via chart formations are more important than signals
- Not all signals are created equal
- Stack your edges – trade only once you have 2 or 3 lined up
- Some instruments are inherently stats driven by the market – let others do the hard work for you
Finally, once you have gained sufficient familiarity with traditional trading tools and signals, the next step would be to expand your “tool box” to include the ability to structure hedging solutions to reduce risk as well as adding some yield enhancement structures giving your overall portfolio a boost.
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