Do Indicators Really Work?

My goal throughout this blog is to share with you the tid bits of information that might not be so obvious when starting out. In this particular post I want to talk about technical indicators and how they should and should not be used in your trading.

If you are the kind of trader who feels most comfortable building your own trading system, then all the more power to you. It is the path most professionals take! It makes it all the more crucial that you listen carefully to the advice in this post because you will very likely consider indicators at some point along the way to buliding your system.

As I'm assuming you are already aware, you have many variations of technical indicators. Moving averages, stochastics, MACD are some of the more popular ones, but there are dozens more.

The most important thing i can tell you is to keep your charts CLEAN. New traders have this false sense of security thinking that they improve their ability to predict price moves by packing the charts with 10 different indicators.

There is a psychological rationale that explains why us feeble humans think this way but i'll touch on that in another post. For now just take my word for it and resist the temptation to complicate things. It will only hurt your progress.

Having too many indicators on a chart serves only to confuse you because they often give off conflicting signals. In other words, one might be screaming buy, another might be screaming to sell and yet others will tell you to sit tight! How does a trader handle that much conflicting info?

The simple answer is that they can't. The trader will eventually suffer from a common trading syndrome known as Paralysis-By-Analysis: You are analyzing too many different factors and eventually find yourself acting on none of it. So strip your charts clean with the exception of maybe one or two indicators at most and build from there.

So, we've established that using too many indicators is almost always counter-productive but there is actually another reason so many traders fail with them. The indicators they do use are used entirely the wrong way!

In my next post i'll elaborate with some specific trading set-ups that make use of indicators that i've had some good success with. I'll explain which indicators those are and how you might consider using them to help your trading.

Stay tuned!