Technical Indicators - Will Too Many Kill a Good Trade?
As a given, every trader will develop their own set of demons
sooner or later. Some of us are able to see our problems right
away and learn from our mistakes.Some of us keep trading in
circles until we don't know what's right or wrong,or why we keep
losing money.
Over the years the biggest problem I've seen with new and
established traders is what's called Analysis Paralysis. Could
this be your demon? Here's what it looks like:
You've just read that article about the 'forgotten
indicator'.This one is the 'secret' that no one wants you to
know about - especially those Floor Traders that make a living
off of Your bank account.
You scan through the 30 or so technical indicators included in
your real time quote service and 'find' that technical indicator
you just read about. Wow!Where has this been hiding - you ask
yourself, chuckling with dollar signs dancing in your head.
You quickly pull the 'secret technical indicator' up on your
chart and the colors come alive.You just know this is what
you've been missing all along.This is the answer to your trading
prayers! That new Porsche can't be far away...
Rolling back in your padded office chair you take a proud look
at your trading screen - you're hypnotized by the moving lines
and colors. There in front of you is your candlestick chart with
the brightly colored bars set against a grid pattern. Your blue
and red converging and diverging moving averages are clicking
right along.
You've settled on blue and red after experimenting with a dozen
different colors .You're still not sure if one of the lines
should be dotted or dashed. Below the chart you've inserted
those thick colored volume bars - can't miss the volume now.
Below that, you've placed a slow stochastic indicator. The
colors have been changed so you can see it from the 'other'
trading indicators. Boy THAT looks Good ! Then of course below
that is your MACD with still more colors and the CCI and maybe
the ADX.
Last week you fooled around with Bollinger Bands and even tried
Keltner Bands. Got rid of those and went back to the double
moving averages. Parabolic SAR looked like a neat technical
indicator - those little blue diamonds showed up great against
the colored chart background. For now you have settled on light
grey as a background color after trying tan, black, green and
white . White - that was too blinding. You decide to scrap the
Parabolic SAR - can't justify what it is doing with the other
indicators. Oh well ...
Does all this sound familiar? In your quest to find the 'Holy
Grail' you've created a monster.
You spend all of your time trying to get all of the indicators
to agree on a trade direction. When two of the indicators give a
buy the others might indicate sell. By the time you get all of
the indicators giving what you think is a definite trade signal
- the action is OVER. You enter the trade and almost immediately
it goes against you. You lose money - again.
What's the problem?
The first problem is you're using way too many technical
indicators. Keep in mind that just about every indicator is a
Lagging Indicator. By the time you see an agreeing signal to buy
or sell from all the indicators you are using,- it's too late.
Price action has moved on and the technical indicators are
trying to catch up.
Your second problem is confusion of color. Your mind is trying
to decipher all this split second information coming across your
charts as well as attempting to figure out all of the color
combos and multitude of indicators. We are spoiled by all the
colors available on our charts and think that some how more
color will help us trade better. Not so.
So what's the solution?
Keep it simple. Keep it clean.
Here is how I set up my charts:
I trade the emini Russell and emini Dow on one and three minute
charts.
I set my up bars in white and my down bars in black,on a light
gray screen - no grid.
The only indicators I use are 8 period simple moving average -
white dotted line and 16 period simple moving average - black
solid line. The moving averages are overlayed on my chart.
Below my chart is Slow Stochastics set at 15/5/3. %K is a white
dotted line %D is a solid black line.
Upper and Lower bands are heavier black dotted lines and at the
50 mark ( center line) I use a yellow solid line.
That's it. Sound kind of boring?
Try this chart set-up and see how much easier it is to trade.