Trading indicators as a form of technical analysis are an important part of the trading system and strategy of many traders. I know we hear that a trading indicator is a crutch but in reality, there is nothing inherently wrong with a trading indicator. It is simply a tool that can be used to frame price and help a trader better understand what they are looking at.
You may not want to trading an indicator alone though. Trading indicators lag price because they are a derivative of price unless you are using a trading indicator based on volume but they are used by traders to interpret what price has done and what price will potentially do.
That is not a big deal and those people that bash indicators and ramble on about the lagging nature of indicators have their own agenda. The bottom line is the the purpose of a trading indicator is to help determine a trading opportunity , a lack of a trade entry, and when to exit your trading position. I tell people I speak with to use what the chart shows you first and indicators second. I could write a book….
Here we have a 20 period simple moving average that can show trend in a few ways. Not shown on the chart but if price is crossing back and forth over the moving average, chances are you are in a consolidation and would not take any trades depending on your trading system. You can also use two moving averages and the crossover would highlight a pending trend change if you need a little more confirmation and objectivity in your trading.
This indicates the potential of a consolidation and you may opt to play a breakout from this zone. You could play each and every cross of the moving average but trading is not that simple.
You can use the information a technical indicator gives you along with basic price action trading knowledge to start to form a workable trading strategy for yourself. You can see that using a technical indicator combined with price action offers a more complete way of approaching your trading charts. With that, you hope your probability of trading success in the long term increases and you begin to take trades that have a higher odds of giving you some traction into positive territory.
Indicators can offer us an objective look at the market and for most of us, that can keep us from doing stupid things. Even though our trading systems use trading indicators to frame your trading opportunities, the trading plans provided hit home the importance of trading adjustments around structures such as support and resistance. It can save you some grief and offer up stronger trading opportunities.
Indicators Analyze Past Data Trading indicators lag price because they are a derivative of price unless you are using a trading indicator based on volume but they are used by traders to interpret what price has done and what price will potentially do.
Getting in the market may be later than buying or selling at the extremes but that is not a big deal. Getting out of the market while waiting for an indicator to give you the nod may cost you though. For now, I will stick with two ideas.
If price is trading above it, we look for longs. We would not be looking for shorts even though the moving average has told us to either short the cross or trade a pullback to go short. Reading price action allows us to ignore the lagging indicator and save ourselves a potential losing trade. Price action is showing low momentum into the peak and we can short a break of support before the moving average crosses to the downside. While the moving averages converge, we can already see signs of consolidation after the shadow puts in a higher high preventing a short trade.
The red line indicates a smaller range inside the larger range and a break of the smaller trading range front runs the larger break. An obvious reversal candlestick that pushes into support from the left of the chart. The inside bar that follows could indicate a long trade depending on your trading strategy long before the moving averages cross over.
Trading Indicators Are Not A Complete Package Indicators can offer us an objective look at the market and for most of us, that can keep us from doing stupid things.
Take a free trading room pass as a gift from us at Netpicks. The following two tabs change content below. CoachShane Trader at Netpicks. Shane his trading journey in , became a Netpicks customer in needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading.
This has allowed less time in front of the computer without an adverse affect on returns. Latest posts by CoachShane see all. Here is the website link:More...