Learn how to switch gears and use different indicators for different market conditions. Indicators are a derivative of price. They simply indicate to you what has happened, not what will happen. So you’ll never be a profitable trader if you solely rely on trading indicators to make your decisions.
This post was originally posted here. The writer, Rayner Teo is a veteran community member and blogger on InvestingNote, with username known as Rayner and has 329 followers.
Most traders will tell you to stay away from indicators.
They give you reasons like:
- It lags the market
- It gives you late entries
- It can’t predict what the markets will do
Nope, those are excuses.
Want to know the real reason why traders lose money with indicators?
Here’s why…
You got conned into the “indicators game”
Many traders don’t know how this game is supposed to be played.
They believe the answer lies in the “right” combination of indicators that will make them rich.
So they buy the latest trading indicators to help them crack the code.
And after many failed attempts, they wonder why they lose money with trading indicators.
Do you want to know why?
Here’s the truth…
Indicators are a derivative of price. They simply indicate to you what has happened, not what will happen.
So, no matter how many different combinations you try, you’ll never be a profitable trader if you solely rely on trading indicators to make your decisions.
Trading indicators are meant to aid your decision-making process, not be the decision-maker.
Trading indicators: Do you make this mistake?
Look at the chart below…
Now, you might be thinking…
“Look how strong the signal is.”
“All three indicators are pointing in the same direction.”
“The market is about to move higher.”
Sorry to burst your bubble.
But that’s the wrong way to use trading indicators.
Why?
Because the RSI, CCI, and Stochastic indicator belong to the same category (otherwise known as Oscillators).
This means the values of these indicators are calculated using similar mathematical formulas — which explains why their lines move in the same direction.
So don’t make the mistake of thinking a signal is “strong” because multiple indicators confirm it. Chances are, they are indicators from the same category.
You blindly copy what others do
Here’s the thing:
There are profitable traders out there who use indicators in their trading.
And you’re probably thinking:
“Since they are making money with these indicators, why don’t I just copy them?”
So, that’s what you do.
You follow the same indicators, settings, instructions, etc.
But, you still lose money with trading indicators.
Why?
Because what you see is only the surface, not the complete picture.
Here’s an example:
Let’s say Michael is a profitable trader who relies on trading indicators to time his entries and exits.
Now, the reason why Michael finds success with indicators is not that he found the “perfect” settings or whatsoever.
Rather, it’s because he knows how to switch gears and use different indicators for different market conditions.
So if you were to blindly follow what he does, then when the market changes, your trading indicators will stop working and that’s when the bleeding starts.
How professional traders use indicators (it’s not what you think)
At this point, you’ve learned that trading indicators shouldn’t be the basis of your analysis and why you shouldn’t copy other traders.
So now the question is, how do you use trading indicators the correct way?
The secret is this…
You want to classify trading indicators according to their purpose, then use the appropriate trading indicators for the right purpose.
So, what’s the purpose of trading indicators?
Well, you can use them to:
- Filter for market conditions
- Identify areas of value
- Time your entries
- Manage your trades
Let me explain…
…
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