Trading: Keeping It Simple

[Alchemist]

Stochastics, RSI, MACD, moving averages, Gann angles, Fibonacci numbers, Bollinger Bands, is any of them confirming the other or is it just the opposite? How many of these indicators do we need to help us find our path to the Holy Grail?

Thanks to the advent of computers, a good percentage of today’s trading is now done through trading systems spitting out trading signals and executing orders on traders’ behalf. Some of them are good and worthy of consideration. Most of them, however, are just plain junk and only commercialized to make money to their creators, not the traders trading them! Trading is simple: let’s keep it that way.

BEWARE OF THE INDICATORS WEB

I see today’s traders population getting easily all tangled up in what I call the “Indicators Web”. Early symptoms of this new traders’ malady is a constantly growing preoccupation with technical analysis indicators and their overestimation as a means to obtain trading profitability. The more you have, the closer you will be to the trading Holy Grail.

I’ll say it once and for all: indicators don’t foresee the future. They can’t tell whether a stock will go up or down on a particular trading day. If they did, we would all have our own nice “trading island”! Indicators only tell what already happened in the past, and some even barely do that! They are good to get the overall picture of a stock or any other financial product. You don’t need confirmation from 10 or 20 of them before entering a trade. Usually, if you are able to get confirmation from all your indicators, it means it’s already time to get out or even reverse your position. Don’t fall for the indicators trap!

FINDING OUR WAY THROUGH THE INDICATORS WEB

So which indicator is worthy considering as a new possible tool in one’s trading arsenal? Even though the bulk of my trading consists of pure mechanical arbitrage which necessitates little to no use of technical indicators, I used to and still do lots of regular mainstream trading. Having said that, as you have probably already guessed it, when it comes to technical analysis indicators, I prefer quality rather than quantity. I tend to only put up a couple of them on my charts. I usually go for a Full Stochastics and RSI. Sometimes I add Bollinger Bands. Moving averages are always there, but I don’t pay much attention to them as they lag too much for my tastes. That’s about it.

I tend to pay a lot more attention to price levels and gaps, and use technical indicators as a quick reference to get the “history” of the stock. What I like about oscillators in particular, though, is the insight they can provide when forming divergences with price action. That is something definitely interesting.

PRICES ARE THE MARKET VOICE: LISTEN TO THEM

I can’t stress it enough: WATCH PRICE LEVELS rather than indicators. Prices are the best gauge of how the market population feels about a particular stock at a particular point in time. Add the old adage “History repeats itself” to the mix and you should have enough material to start doing some heavy pondering. Watch support and resistance levels and “listen” to how people react at those levels. Whenever support becomes resistance or the opposite, take note of how quick and how tough it was for prices to break through. You will need it next time prices approach the same area.

Also, watch gap levels and take note of that too. Moderate to large percentage gaps tell us something out of the ordinary is happening either to a certain product or its underlying general market. Market participants react to unforeseen events by gapping the stock up or down. Most times, when emotions subsize, prices go back to their previous levels. Thus, partially or fully closing the gaps. Trading is as simple as it can be. Keep it that way!! Don’t be an indicator junkie.

[MomentumTrader]

very much so. I used to have my charts crowded with indicators too. Then, I removed most of them, and my life became a lot easier!

[StockOperator]

the Indicators Web! Interesting way of looking at it. You are correct when you say traders often pay too much attention to indicators, neglecting many other more important trading concepts. It's overwhelming!

[ChaosTheory]

I like your concepts. You should write a book!

[FXSurfer]

This rings so true! With so much indicator-mania everywhere,
it's nice to see that I'm not alone in recognizing the need to
break free of the web. We are still clearly the minority though.
Maybe the 5%. LOL

Thanks!
Brent

[Soverus Khan]

Welcome Brent. Squiggly lines make me dizzy.