Indicators, any beginner is bound to hear that word a thousand times as they try to figure out what to use when trading. There are literally thousands of them out there, Oscilators, Histograms, Trend lines, Channels, indicators that measure momentum, some that measure oversold and overbought conditions, ones that measure whether you are smart enough to trade ..... ok maybe not those ones (but if anyone knows of them let me know ... I am having some doubts), so just what do you use and how do you use them?

Well here is the answer, if you want to make millions of dollars you need to use ................ oh come on as if I would know! .... noone can tell you what to use, and even if they do, there are so many variations and settings that even if you are using the same indicators as someone else, you could have different settings, and even if they are the same, everyone interprets the signals from these indicators differently.

Now I am not an expert on any indicator, actually I am not expert on anything to do with Forex at the moment :) (hence the quest for the "am I smart enough" indicator), so I won't be able to explain the finer details of what indicators show, but there are some general principals that I have picked up in my travels so far, and as I have a memory like a sift (that is the round thing with lots of holes in it for those that are "cooking challenged"), I figured, lets ramble on about them here and maybe I won't forget them in the future. So ...

Well I think sooooo ... kinda .. well you know .. maybe ...

Heard something like that before? If so you probably have a teenage sister/daughter/cousin and it is the classic response of someone who think they know, but don't want to commit for sure (no comment from the women please!). Well this is how I think about indicators, they tell you something, but don't take it for granted, they are called "indicators" after all, so while they might be able to clue you in on a possible movement in a particular direction, you need to seek confirmation from other sources, such as the price movement itself or other indicators that tell you different things. That brings me to:

Me and billybob ... we's like peas and carrots ...

Ok that isn't the exact line out of Forest Gump, but there is a message there for us beginner traders. There are so many indicators that it is easy to end up with all sorts of lines, bars, colours and arrows floating around the screen. I have seen many a trader complain that the 3 different indicators told them the price was going to go up, and instead it went down! (ok that was me). So why would this happen? Is there something wrong with the indicators? Perhaps some news came out that reversed things, maybe I have my monitor upside down! ... all of these things could be the case, but for us beginners, I bet it is because those three different indicators were all of the same type, so they were simply confirming the same thing three times, essentially three sisters who were in the same place at the same time looking from the same perspective, all saying "well maybe kinda" at the same time! Before you can believe them, you need to get confirmation from another source, someone else who doesn't have a phone surgically attached to their ear, somone with a "different perspective". There are different "types" of indicators, or indicators that tell you different things. Some of these are:

• Trend indicators
  These are handy little buggers that tell you which way the market it trending (fancy that ... Trend indicators telling you the trend .. who would have thought), which can either be up, down or sideways. Some examples of these might be Moving Averages or Trend lines.
• Strength indicators
  A group of indicators that signal the force behind a move, I have very little exposure to these but I believe Volume is a good one for that.
• Volatility indicators
  Volatility, or how much price is moving between extremes in a given time frame is another group, something like Bollinger Bands is a good example of this type.
  
• Cycle indicators
  Cycle indicators are there to signal repeating market movements, a bit like the tides, some markets supposedly move in cycles, which means if you can identify them, you get a head start on your trades. Elliot Wave theory is a good example of this kind of indicator.
• Support/resistance indicators
  The most common type of Support and Resistance indicators is good old manual trend lines. These serve to indicate when an iminent price move may be underway.
  
• Momentum indicators
  Momentum indicators help you determine if a trend in progress will continue, or is on it's final legs. They can also be used to try to indicate upcoming turning points. Some examples would be the RSI, MACD or Stochastic indicators.

So if you are using three indicators, and all of these indicators were momentum indicators, then there is a good chance that all these would tell you the same thing, giving you a false sense of security. So when developing a trading system of your own, try to pick an indicator of your choice from different families to ensure your signals are more reliable. In a word, diversify.

Another trick is to look at using these indicators on different timescales. If a 1 hour chart indicated a strong down trend through a trend indicator, the prices were rising on a 15 minute chart but a momentum indicator was giving you an overbought signal, then a possible resumption of the long term trend could be on the cards. You could then move to a 5 minute chart to find your entry through an indicator that is showing you if something is overbought or oversold, hence showing a possible turning point. That is the theory anyway.

Now I can't tell you which indicators to use, cause ... well I can't figure out which ones I like myself yet, but if you are aware of not using too many from the same family, it will save you a whole bunch of confusion and many a thumped desk.

One last thing, more than likely at some point you would have looked and tested so many indicators that you will be all confused out which is the best one, my tip, stick to the indicator you first saw and went "aaawww yeh I get it". Chances are it is just as good as the others, and it was the one your brain processed first so will most likely be the one you will be able to interpret the best.

Ok happy trading for the upcoming week! See you all later.

This entry was posted on Sunday, September 18, 2005 at 9:23:00 PM. You can skip to the end and leave a response.