How to protect yourself from falling into the category of traders who have been searching for ideal options for indicators for years and, of course, do not find them.
cause there are no perfect parameters
So today, let's talk about:
How easy and simple to navigate in the universe of indicators,
What are the pros and cons of each kind of indicators,
Why they never bring you a pot of money
Traders often ask “Which indicator to use?”.
This is the wrong question.
The correct question is: “What unites all the indicators?”
It is important to understand, on the basis of what they are built, in order to see the features of any indicator and mark each of them properly. It is also important to know their disadvantages in order to get rid of the illusions of earnings thanks to the “right” indicators.
The principle of operation is important to think about while looking at a chart.
3 groups of key indicators:
1) Trend tracking. They give the highest quality signals for entry and exit points while the market shows a trend. Not suitable for sideways trends.
The basis, Moving Average, the moving average indicator serves as a base for thousands of indicators, including Alligator, Bollinger Bands and others. You will be able to estimate their quality quickly if you learn the principle of building MA, its advantages and disadvantages.
Trend traders are popular: they make about 49% of the indicators of all that you can find.
Its disadvantage: a bit late.
2) Overbought or oversold indicators. They work in sideways trends: they give reliable signals if the market is almost at the same place, and false if the market is moving in a trend.
Their “share” among all indicators is also 49%.
Here the problem is different. The problem is to determine what the final stage is when it is already meaningless to enter.
3) Other indicators. Their peculiarity: to give additional information about the market, and not about access to prices. For example, ATR is an indicator for estimating the adequacy of goals or a net position indicator. This group of indicators takes about 2%.
The main problems of the indicators
1. A top problem — heaping up indicators.
How to kill your trade? Put 5-6-7-10 indicators on the chart. Trading will start to struggle with indicators in an endless attempt to customize and mix them.
Most traders succumb to the illusion of the indicators’ simplicity, thinking that they are as a solution to all possible problems, and mercilessly put them on the schedule.
What is the mistake? Newbies forget that most indicators are based on price, they are derivatives of market movements. They reflect what happened in the recent past, but do not analyze the data.
The schedule of price movement gives more information and makes it in the right moment. However, for additional analysis, you can connect 1-2 indicators, not more or you shouldn’t use them at all.
2. Customized for historical data.
Another problem is the manipulation of statistics.
What makes a naive trader? He takes the indicator options, which were ideal as part of a movement in the past, does not test them on current data, but immediately uses it in his trade.
As a rule, this leads to a loss of funds, since it has nothing to do with reality.
What is the basis of the problem: the temptation to find the perfect trading system (spoiler: there are none).
Indicators are subjective, their options are adjusted to past data, and there is no guarantee that they will also work on future data. It is important to know: there is a great chance that it will not work.
You should: read the graph, test the stats, optimize using other indicators.
3. Use a longer period than the one for which the indicator was prepared.
Nice try, but the indicator starts to lag.
They are built on the basis of a fixed number of candlesticks, usually, 3, 5 or 6, and are not able to take into account large periods of market movement.
4. The indicators do not take into account the model of traders behavior in the area of support-resistance levels: areas where the market participants start to open or close positions because they know that the majority of market players will do that.
- Indicators can be divided into 3 large groups:
- Trend trading (lagging);
- Overbought - oversold (you are lagging);
- Strange (in fact, "other", with the market signals, and not about entry and exit points).
- Do not heap up indicators
Remember that indicators do not analyze the market, but only reflect the price movement, and it is already in the past.
You should: understand the principle of each type of indicator, connect 1-2 for additional analysis, take into consideration the realities of the market.
- Do not customize stats
Remember that there is no perfect trading system, and there is no sense to waste time, nerves and money on its search.
Instead of it, it is worth testing the statistics, and optimize it using indicators.
- Do not increase the period
Remember that in this case, the indicator will start to lag
You should know for what period the indicator you need is calculated.
- Do not forget that the indicators do not take into account the psychology of the market in the area of the resistance and support lines.
Remember that technology helps to earn, but does not work for you (at least, right now)
It is worth using a market map.
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We wish you all the best!
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