7 Tips on How to Use Technical Indicators

7 Tips on How to Use Technical Indicators

7 Tips on How to Use Technical Indicators

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.

7. Patience

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.

How our Fight or Flight Instinct Works Against us in Trading

How our Fight or Flight Instinct Works Against us in Trading

How our Fight or Flight Instinct Works Against us in Trading

What preserved us for millennia can be a burden for trading

Depending on multiple factors, from fixed ones like age and gender, to more variable ones like social status and life experience, we tend to approach the concept and act of trading in different ways. Some have more patience, others are quick to get a temper. Some are more analytical and good with numbers, others rely on instinct to tackle the challenges of the market. But we all share the basic instinct to protect ourselves deep within our brain – a universal reaction that lies beneath the surface and shows itself only when there’s real pressure.

The problem, or maybe challenge, here is that this particular part of the brain is quite active when it comes to trading. Risk isn’t an everyday occurrence as it was for our species not long ago. Our everyday lives have changed in a small period (in evolutionary terms) from one where threats surround us and we have to carve out a niche between them just to survive, to one where almost everything that involves risk has been removed and some of us begin to crave risk as a sign of reality. It all boils down to the level of fear and uncertainty we have.

See how fear and uncertainty go together. But they shouldn’t. Not in trading. Fear is the strongest reaction we have for self-preservation. Our inner caveman is still within us when we enter positions and stop-losses and acts like he’s under physical threat when they turn red. This feeling can be quite overwhelming (whether we admit it or not) and affects the rational part of our brains – the one responsible for handling complex operations, such as entering and exiting a trade, its amount and duration.

We are influenced by our limbic system to revert back to a more simplistic mode, one that doesn’t have a preset trading plan and acts on impulse when managing risk should be done in a calculated fashion. If you do see some of this behaviour in yourself, don’t immediately take it as a mistake or something wrong. It’s how we’re hardwired and it takes training and conscious self-observation to overcome it.

This is actually no easy feat, as the dangers are two-pronged. Fear fuels uncertainty and anxiety, but the instinct to stand and fight, because there is nothing to lose, is also a risky behaviour. It’s best illustrated with all-or-nothing trades, where the whole available account is placed in a single trade whose owner is either looking to get his losses back, or is trying to win big with one big master stroke. We all know how that usually ends.

Coping with this requires experience and molding your mindset to what is best for trading. Hesitation and doubt will be things you’ll just have to take, especially compared to almost any other daily activity you are involved in. Feeling anxiety and having a fast pulse during the execution and duration of a trade will happen with a strong intensity, especially once you begin on the trading path. They are the signs of your primal instincts meddling in the process.

But your aim should be to see them decrease and even fade away. This can be achieved through your conscious expectation that they will happen at one point or another. Then comes their management. It’s how you look at trading – never can it be only about the instrument, the trend or the news. It’s about you under pressure and being able to quell fear and understand uncertainty.

6 Tips on Managing Emotions and Behaviour in Trading (Part 2)

6 Tips on Managing Emotions and Behaviour in Trading (Part 2)

6 Tips on Managing Emotions and Behaviour in Trading (Part 2)

The most common emotions traders experience and how to prepare for them

We continue our look at the main emotions that influence traders. Last week we discussed elation, surprise and anger and today we continue with some of the more negative influences on the behaviour of people in the markets and some ways to limit them, or even turn them around.

Continue reading “6 Tips on Managing Emotions and Behaviour in Trading (Part 2)” »

6 Tips on Managing Emotions and Behaviour in Trading (Part 1)

6 Tips on Managing Emotions and Behaviour in Trading (Part 1)

6 Tips on Managing Emotions and Behaviour in Trading (Part 1)

The most common emotions traders experience and how to prepare for them

Emotions hold a special place in trading. Their impact has been the subject of many studies and approached from multiple angles throughout the last decades. In this first article for our new Trading Psychology section we will be looking at a what the main emotions experienced by traders are and also how they can be managed to better serve the goals of the trader.

Continue reading “6 Tips on Managing Emotions and Behaviour in Trading (Part 1)” »