Indicators can help find some market tendencies but you must learn how to use them properly.
Indicator trading means to use technical indicators to examine the stock price and ensure trade signals. Trading indicators handles stock price data utilizing mathematical formulas. In essence, indicators will show you an illustration of the mathematical formula and stock price data. But you have to be an experienced chart reader or elite trader to notice that indicators will not show you more than the simple price chart without indicators.
But indicators may help to simplify it and that’s the reason why indicators are so attractive to fresh traders. Well, it is simpler to find an indicator that will define the trend or trend reversal than to learn how to examine and find a trend on the stock price chart.
So, behind indicator trading lies the simplicity of using.
Indicators will provide you a particular trade signal and alert you that is the time to enter a trade.
We can say that technical indicators are primarily formulas that help to examine chart data. They are accurate, they are simple, also, they request less time and give direction to price charts. But here is the tricky part. Indicator trading doesn’t mean that you will have 100% successful trades.
What are indicator trading strategies?
The main problem is that you can find numerous indicators and new indicators appear almost every day. But you can combine them and create an indicator trading strategy.
For example, a crossover strategy which means that price or an indicator crosses way with different indicator. Let’s say that price crossing a moving average is one of the simplest indicator trading strategies.
One of the variants of this strategy is when a shorter-term moving average crosses a longer-term moving average and it is so-called a moving average crossover.
Some crossover signals combine an RSI moving above 70, for example, and then go back under. When you see this signal you can be sure that there is the overbought condition and a pullback will occur. Thus, when you see a drop under let’s say 20 or 30, and it is accompanied by a rally back over 20 or 30, it is an indication that the rally will come.
Also, you can use indicators as a tool to confirm your opinion in trading since they will show you reversals and downtrends. There is one thing you have to keep in mind, a lot of indicator trading strategies will not result in profit.
What are the disadvantages of indicator trading?
So, it is obvious that indicators have their flaws. The problem is that they make calculations based on historical prices, so they don’t provide any outside insights. If you practice indicator trading in the stock trading, technical indicators will never give you actual data about the company.
Moreover, indicators usually come after the price chart. So, the following situation may occur. Let’s say the current price is changed for a short time and got back, but your indicators will be changed according to the previous price but you entered the trade based on them. What is likely to happen? Your entry point is wrong and you could end up with a loss.
Lastly, indicators may oppose each other. Also, the same indicator may display different things at different times. And you have to recognize when they are accurate.
This is the reason why many traders have doubts about indicators. Yes, you can find various indicators or develop your own by using software but you have to use them properly.
How to use indicators properly?
Firstly, don’t expect a miracle from indicators. All you can expect is that your estimation will be a bit more accurate. But your decision shouldn’t be based on one particular indicator. The reason behind is that all indicators are not the same. Each of them has its own philosophy and mission, to be said.
You can find many types of indicators, for example, trend indicators, volatility indicators, oscillators, etc. But indicators are useful only if you use them in line with their design. For example, the trend indicator is adjusted to recognize and follow a trend. You cannot use it for the price in a range because you will miss its full potential. Another thing is very very important. Indicators may provide you faulty information if you don’t use them in a proper way.
The benefit of indicator trading
As we said above, they can simplify price moves. For newbies in the stock market indicators are easier to understand than the complicated price chart. But easy isn’t always profitable, you should know that and keep that in mind.
Indicators are outstanding tools for mastering how to find gaps or strengths in the stock price when trends are weakening. They can be very helpful for new traders that still have a problem to guess on a price chart. With the help of indicators, they could recognize the fine tunes they have not yet qualified themselves to notice on the price chart.
How many trading indicators to use?
In indicator trading, you will need several indicators to know when and how to enter the trade. If you use only one indicator it is possible to get false signals. A lot of them.
For example, the MACD provides crossover signals and it is smart to sell when the MACD graph goes under the signal line. But if you are a really smart trader, you will not sell every single time when MACD shows that or you’ll have a lot of losing trades. So, you will need to use some other indicators as control or filter in order to recognize the trend. For example, the moving average can be useful. In this way, you’ll increase the number of valuable signals. Simple as that.
But be cautious, if you use too many indicators you may overanalysis your chart. That can have a bad influence on your trade.
The experts’ recommendation is to use up to 5 indicators per trade. Actually, 3 indicators are quite good enough for a solid trading strategy.
The indicators are a key part of technical analysis, after all. But do you really need indicators for profitable trading? Actually, no. Surely, they can give you strongly aid and improve the results of your trading and they are worth using. On the other hand, never observe indicators as only and the most important part of trading. The truth is they can simplify your trading more than price action trading. But keep in mind, as we said, the simple isn’t always more profitable.
Use indicator trading to recognize occasions when to get in or out of the trade since it isn’t always visible in the price charts.
In most cases, indicators will not tell you what the price chart is not telling you. Hence, use indicators if required. If you see they are not raising your profit, give up.
Is there any other reason you may have to use them? No.