Technical Analysis – Indicators
Which Indicators should you use? by Craig Fisher
One of the early decisions a new trader needs to make is what sort of trading they wish to undertake. Usually following on from that answer, the question as to whether some type of stock market analysis tool (i.e. trading software) is required, then presents itself.
As the budding trader embarks on the due diligence of purchasing a trading software package they can be subjected to the amount of indicators the package has or can be created, as a selling point. Once the decision is made and software downloaded, a potential problem begins to manifest itself, unbeknown at this point to the trader. Within the indicator section of the software is a plethora of indicators, each with adjustable parameters, styles and colours.
They may be lines, histograms, dots, or a combination thereof. The technical analysis journey begins; the process of analysing each indicator through different settings to find that elusive ‘holy grail’, the perfect indicator just for your needs that is going to help you make a fortune. The trader moves from one indicator to another and soon enough is inflicted with ‘analysis paralysis’ – going around in circles and quickly diverging from their trading goals. Furthermore, the analysis is often flawed with the bias of spotting the good examples that worked in the past and not understanding the circumstances under which the trading account would have been churned.
Most of us would have heard the maxim of keeping things simple, the KISS principle. The use of indicators at any point of your technical analysis within your trading plan is a prime example of when to stick to this principle. Keep it simple, less is more. Understand what an indicator can and cannot do, use them sparingly and remember that price is the truth of the market. Don’t fill your screen with so many indicators that it distracts from price action.
On a day to day basis when doing the Discretionary ASX and US Power Setups® at The Chartist, I look at indices with price, volume, divergence and a momentum indicator to give me a picture of the broader market. When it comes to analysing individual trades, I use price and volume (for anyone seeking quality information on volume analysis, I would recommend “Master the Markets” by Tom Williams) on my main screen -nothing else!
I have a secondary screen which has price and our divergence indicator on it, mainly for specific divergence setups. It doesn’t get much simpler than that. There is a couple of other indicators that I may look at from time to time, or for specific trades, but not on a daily basis. If you are trading on a discretionary basis, using several indicators and not getting the results you want, I challenge you to resort to price and volume alone. You may just be pleasantly surprised.
For those just starting out on their trading journey, remember less is more and understand that you will not find the holy grail to trading in your software indicator section.
This article is written by Craig Fisher, Portfolio Analyst at The Chartist. Each day Craig is responsible for the Growth Portfolio, ASX and US Power Setups® signals.
