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June 12, 2020

The More Indicators, The Better?

Frank Cabibi

As a trader, you may see some analysts use lots of indicators in their trading. Sometimes, it's hard to follow because the charts are unreadable from of all the indicators they put in. In a sense, lots of tools are helpful, but they are not always helpful when they are all clumped on a single chart. In fact, the more indicators traders use when drawing up charts causes confusion and are mostly unsuccessful.

Common Indicators

Some very common tools that traders like to use include moving averages, stochastic oscillators, bollinger bands, relative strength index, or Fibonacci retracements. These are just a few of the most common things we see on charts, but what is the most useful and how many should we use to optimize our win rate as traders?

The answer may sound cliché, but it all depends on you. Yes, technicals are important in trading, but they don't always work. I've been in countless trades where my technical barriers were broken, resulting in a loss on the trade. Trading is not a perfect game, and more often than not, technical analysis will not be completely accurate. This is due to momentum, greed, fear, news and other things. If you were to follow a SL/TP ratio of 1:3, you're only giving your stop loss a third of what your take profit would be. In some cases, the trade may not be able to run its course. You may be right about the overall call, but you got stopped out because of the ratio. One thing beginner traders like to think is that you need to work out everything beforehand and make sure it's perfect. In my opinion, that's not true. I thought it was true when I first started, but I found out that the markets don't work like that.

Before I move on, I would like to say that creating a plan is very important, but the plan doesn't have to be perfect. Not every trading set up will look perfect in real time. Setting a pending order doesn't always get reached, stop losses cut off potential winners, and TPs are often missed. What's important to note is that technicals should be used to help gauge entries. I've been in plenty of trades that put me in drawdown in the beginning and ended up being winners. Instead of being perfect in your entry/strategy, let the trade happen, because the markets aren't perfect. There is no such thing as a 100% win rate as everyone deals with losses. You can always adjust your trades to cushion the drawdown. You can also see some winners really run.

Conclusion

One average, I'd say that traders should use only a few indicators in their trading. Indicators are just tools that highlight specific market behavior and allow you to see what you need to see. It's supposed to point out the obvious, it shouldn't be something you have to dig for. Relative Strength Index shows whether something is overbought or oversold. Moving averages will let you see how far the price is deviating from the mean. These tools are very easy to use and see. If indicators are too difficult to see, then the majority of traders will not see it. If traders don't see an obscure support line that somebody draws on their own chart, the odds of other traders picking up on that are very slim. Instead, look for the obvious, and trade what's clear. I can attest to that you won't be second-guessing every move you make. And you will make trading easier.

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Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

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