Well, where do I start?
There are so many indicators out there that it can be a little daunting to work out which one to use or which ones to at least consider.
Over the years, there have been a small group of indicators that have stood out for no other reason than more people talk about them. It is almost self-fulfilling in that the more that people talk about them, the more people talk about them.
The premise of using technical indicators is that they make it possible to anticipate the direction of a share price’s movement with a certain level of accuracy.
Let’s be up front about something, however. No indicator is perfect and no single indicator will be right all the time! Indeed, several indicators will often produce varying signals. However, when various indicators produce similar signals, particularly over a short period of time, it can make you more confident in initiating a trade.
So which indicators should you use? It is really up to you. I have compiled a short list below with accompanying descriptions. The only way to really validate an indicator is to open charts with the indicator applied and cast an eye over time over many charts to ascertain how well the indicator has predicted price movement based on the indicator’s interpretations.
Some software allows you to conduct what is known as ‘backtesting’ – going back over historical data and compiling statistical results of theoretical trades based on specific conditions like entries and exits.
Here is the list so far:
- Relative Strength Index (RSI)
- Stochastic Oscillator
- Moving Average Convergence Divergence (MACD)
- On Balance Volume (OBV)
- Directional Movement
- Bollinger Bands
- Parabolic SAR
- Williams %R
- Money Flow Index
Do you need anymore indicators?
The truth is that I could keep going here for pages and pages, introducing the hundreds of technical indicators that have been developed over the years, but I am not going to do that. This presents some interesting questions. If there are hundreds of indicators, then which one(s) should you use? If there are hundreds of indicators available, then why I have chosen to introduce only these above? Do you actually need to use any indicators?
These questions have troubled traders for years and will continue to do so. I went through the search myself, looking for the right indicator to use, and every time I heard someone new present a seminar about trading, I ended up considering the indicators that I had learnt about during the presentation in my own trading. I used to think like a lot of people do — that is, ‘If he (or she) is using these indicators, then they must work, so I am going to use them’.
Even though I have introduced these indicators to you, I must honestly tell you that I personally don’t use any of them, and haven’t for a number of years now. The indicators introduced above were chosen because I believe them to be the most popular indicators, used by the greatest number of traders.
I am not saying that they don’t work or that they won’t assist you with your trading. I tested the various indicators to see if they would provide me a significant advantage in my trading, and for me, they all came up negative. I therefore questioned the need to use any of them in my trading. The truth is that no indicator is infallible, and they often provide false signals. If they don’t provide a marked advantage to you, if they don’t provide you an edge, then why use them?
The only indicators I use are a moving average and a couple of very simple indicators I developed myself, and their use is limited to my entry decision. The whole premise behind my use of indicators is to keep it simple.