Indicators are one of the best and worst thing to ever happen to trading. How many times have you heard" I'll go long once my MACD crosses over" or " My EMA is up I should buy" indicators do nothing but show you what just happened. There is no such thing as a leading indicator, if indicators were leading then we would simple buy or sell when they tell us to. If anyone pressures you to buy there "leading indicator" RUN away as fast as you can. Now there are some good indicators that can make our lives a little simpler but these are all tasks that can be done by hand, lets dive in and take a look at the good the bad and the ugly world of indicators.
The Good:
Indicators can help us save time, for example we use an OHLC (open high low close) indicator every single day. This indicator simply marks the previous days levels on our charts and saves us the time from going and marking up our charts and labeling them. This are the type of indicators ( other then the 21 ema) we suggest our members to use. Now why is that you may ask? The reasoning behind this is they are simple and there is no room for interpretation, if it says the close of yesterday is at 3204 then it is. You don't have to wait for something to turn red or green and hope it works this time. We also use this to show us what levels we should be aiming for today. Example if we have a large gap up we know there is a possibly we could see a gap fill play and look to target the close of yesterday if the price action starts to head that way.
The Bad:
Indicators are lagging, like mentioned above there is no such thing as a leading indicator so why do so many new and experienced traders rely on them? Simple, indicators are a crutch and the traders price action reading skills might not be up to par. Take for example one of the most basic indicator setups, the EMA/SMA cross over, your indicator is calculating of old price action data. If you were able to read the price action when it was happening you would of been able to get in long before there was a cross over. Same goes for MACD and any indicator that is supposed to signal you in. Now can indicators be used as a part of the entry criteria, yes. Take for example our rules for entry, we always look to see the EMA is in our favor but just because the EMA is up does not mean we will be taking longs. We first have to make a case on why we should enter the trade and we need more info then" the EMA is up" to validate an entry.
The Ugly:
Too many indicators will lead to an unreadable chart, if your chart looks like the one below then
your in for one heck of a rough ride. Even if you use significantly less indicators you are still going to have an issue, why would you add distractions to your chart. All these indicators will end up making you second guess your self when it is time to pull the trigger. How many times have you said to your self" The EMA is up but the MACD is down, what do I do" or something all these lines? MY guess is we have all done it, get rid of those indicators and streamline the entry and exit process.
In closing, when it comes to trading sometimes less is more. Fewer indicators mean fewer distractions and a much clear prospective of what is going on. Have issues with your indicators and don't know where yo go from here? Become a gorilla futures member and learn how to trade with less.
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