I recently taught a Professional Trader class where a student had a sudden realization while doing some trading in the classroom. The student had read about some very technical and intricate systems for trading the markets and was overwhelmed and confused. Fortunately, he decided to abandon those systems and keep an open mind while learning the Online Trading Academy core strategy.
During a live trading exercise in class, he exclaimed, “Can it really be this easy to make money in the markets? It is so simple!” The student was following the rule based strategy we teach in our courses and finding success. The best part of this strategy is that it is a simple, objective process that can be easily duplicated.
In a recent Extended Learning Track (XLT) session, we discussed the proper use of indicators in our trading. There are several inherent dangers in using those types of technical tools instead of simply focusing on price action.
Technical indicators mostly measure one of two things. They can measure strength of a trend, or they tell you whether the price is currently overbought or oversold in relationship to recent prices. The tools that measure the strength of a trend are commonly referred to as momentum indicators and include MACD, Moving Averages, ADX and others. The overbought/oversold indicators are usually referred to as oscillators and have a line that marks those conditions. RSI, Stochastics and CCI are a few examples of the oscillators.
The reason that these indicators are not part of our core strategy is that these indicators are delayed and all of them have weaknesses. We will only use them to support our trading decisions to enter or exit trades and never rely on them as the trigger for our trades. Nothing replaces supply and demand and price study as an indicator.
What would be the momentum in a sideways, basing market? If you answered that there isn’t one, you are correct. That is a basic flaw in the momentum indicators. When price starts to move sideways, they consolidate as well and fail to offer useful trading information. A trader needs to stop looking at that indicator and focus their energy on price or a different tool.
In the case of price basing, we would be better served by using an oscillator to support our trading decisions. The oscillator can confirm overbought situations at supply levels and oversold situations at demand, thus increasing your chances of making the right decision for your trades. However, you need to be careful in heeding the signals from an oscillator in a strong trend. You will find that there will be a lot of premature signals as the nature of an uptrend is to see overbought become more overbought. In a downtrend, oversold tends to become more oversold and the trader using the oscillator signal will exit too early and watch as price continues to their target without them.
Some oscillators can be used in a strong trending market with some adjustments. You need proper training to know how to adapt these indicators and also when to do the adjustment. The main thing to remember as a trader is that price is everything. Knowing how and when to use the right tool at the right time to support your trading decision is critical. Learn the proper way to use your tools at our Professional Trader Course at the Online Trading Academy center in India.