The Wonderfully Complex World of Technical Indicators

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RSIMarket technicians and technical analysts have, over the years, provided us with a plethora of indicators to use for trading and investing. Some are super complex and some are ridiculously simple. There are indicators for every time frame imaginable. There are even technical indicators for fundamental investors. It can be a nightmare for a new trader to sort through. There are countless combinations and ways to use these indicators, and people are continually developing new ways and combinations of new indicators to use. My advice? Keep it simple.

How to choose which indicators to use?

Personally, I subscribe to the KISS model (Keep It Simple, Stupid). Some of the more commonly known and widely used indicators are stochastics, ADX, PSAR, Relative Strength Index, MACD, VWAP, moving averages, Bollinger bands, Average True Range, and a variety of fancy oscillators. Even for experienced traders, learning how to use many of these indicators can be confusing and problematic. After a while, traders will eventually settle on a handful of indicators that suit their trading styles and strategies. Ultimately, as a trader or investor, you have to choose what works for you. Something you are comfortable with, and not just something someone else said you should try. What works for me may not work for you. The urge to switch things up when you are in a trading slump can be pretty intense. Don’t throw your playbook out the window just because you are experiencing a draw down. Instead, reduce your size and exposure and take small bites. The market is cyclical in nature, just as our trading is. We win some and we lose some.

What do indicators do I use and why?

I have been trading for 9 years now and have used nearly all of the fancy and less fancy indicators out there at one point or another. Again, I find myself circling back to what works most consistently, and that usually coincides with simplicity. For day trading, I use VWAP (Volume Weighted Average Price), the 9, 50, and 200 exponential moving averages and Relative Strength Index, and Volume. That’s it. Occasionally, when I find myself in a longer term, trending trade, I will use PSAR (Parabolic Stop And Reverse). For swing trading using a daily chart setup, I use the 20, 50, and 200 exponential moving averages, Average True Range and Volume. Additionally, I use the TAS Market Map and TAS Boxes on the daily chart. What is TAS? TAS indicators are used by a ton of institutional traders. So, knowing that big money traders and investors are using these tools to help them identify their entries and exits on trades, wouldn’t it make sense to want to see what they see? I realize for new traders, the cost of using TAS indicators can be prohibitive, but as you progress and advance in your trading journey, so too shall your bag of tricks. Remember folks, follow the smart money. If you can get in front of them on trades, your trading life will become remarkably easier.

Now what?

So, for you folks reading this that are traders, you probably know a lot of what I am saying already. For you folks new to the industry, this may not even make any sense. There is a mountain of knowledge one can and must obtain to become a trader. I don’t recommend starting your journey with charting software and technical indicators, but, it will be a bridge you must cross at one point if you are to trade and invest profitably. One of the things I tell my students in my swing trade course is, work smarter not harder. I cover all of the indicators I use in great depth, as well as how to read charts and setup software for proper stock scanning and trading. In the beginning as a trader, you will have a mountain of knowledge to obtain. I highly recommend checking out the technical indicator section over at Investopedia for more specific information. Over time, you begin to delegate the daily need for information to indicators that you learn to trust and rely on. Once you see how all of these things interact, you start to see the bigger picture. You understand at that point, that you don’t really understand anything. A question leads to answer and three more questions. It is the ultimate puzzle. And I look to understand and solve it piece by piece, tick by tick.

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