How experienced traders apply them
After we introduced technical indicators and analysis the next logical step was to expand on them. Not because they are incorrect or incomplete, but because they only give you the tools for using indicators without necessarily showing you how to use them. These seven tips give insight into what experience has taught many a trader.
Pick the right indicator
Base your decision on our previous articles, as some indicators are not suited to reflect and predict certain instruments. Some are more volatile, others take time to react to changing conditions and some indicators can’t catch these differences. The devil is in the detail.
2. Visually confirm if the indicator works
This means looking at the movement on the chart and comparing it with what the indicator shows. If they do resemble or correlate with each other (depending on their visualisation) then that can be the foundation of a beautiful relationship. But if they are clearly not related, then you can go to step three on this list or back to step one.
3. Adjust the values of indicators
To make better use of an indicator, just like any piece of equipment, tweaking it to better suit the task at hand is recommended. Study the variables of the indicator you’ve chosen and adjust them to better reflect the behaviour of an instrument and the conditions in which it’s operating. It might turn out that it wasn’t tuned properly.
4. Keep the basics in mind
Support and resistance and trends are powerful allies in technical analysis. They have proven to be some of the most reliable tools that can be employed during trading and can show if an indicator is reliable in general, or only for some signals, or only in certain conditions. They are ideally suited for confirming signals based on the calculations that define the indicators. An indicator can be good when it says when to follow a trend, but not for short-term movements in the opposite direction.
5. Two is company, three’s a crowd
Quite true when it comes to working with technical indicators. You simply don’t need more than two at a time. If you rely on more indicators the usual effect is that they act as filters that stack up on each other, giving you a smaller number of trades to make. You can even get opposing signals for when to buy or sell.
6. Indicators around (major) news events need extra attention
These are times of heightened volatility when emotions can take over the markets. Things might eventually turn around, but for a certain period fear and greed might overcome a trend or what a solid indicator is showing.
Other traders actually use the indicators as predictors of directions before the events, relying fully on the principle that emotions should be excluded from trading and often acting contrary to popular opinion and sentiment.
Once you start using the levels of an indicator as your entry and exit signals, it’s a different trading experience. Initially traders feel more secure, more relaxed, as the responsibility for making the trade has shifted elsewhere. But then comes the harder part – seeing it through if things don’t go your way. Waiting for the exit signal, which might come either sooner or later than expected, is a familiar challenge for traders that rely on the news or fundamentals, but here it requires a new mindset. As you are effectively trading within a framework, the best thing would be to see it out and adjust accordingly if your initial plan wasn’t so good, but not before that.
Do you have other tips for using technical indicators? Any questions about this list? Let us know in the comments and we’ll get back to you.