In the beginning, as a new trader, you sit in front of a pristine empty trading screen. The only markings on your computer are the stock bars in their primitive form. You look at these bars rising, falling and moving sideways while scratching your head; you ask yourself, "How on earth am I meant to work out where this stock price is going?" It is at this point that you start to think that there must be more to technical analysis, which is when you discover the technical indicator.
Now, trading in the 21st century has its perks. With each year that goes by and each new trading system that is developed, we seem to discover a new technical indicator, a new way to reinvent the wheel, it would seem.
I still remember the first indicator I used, Moving Averages, closely followed by Volume, the 5-35 Oscillator, MACD, Stochastic and the ADX / DMI...and on it goes. This, folks, is the basis for this article. What starts as a simple quest for technical analysis depth and understanding soon becomes this overwhelming urge to use each and every technical indicator you have ever seen or heard of.
Why do we do it? Well, because we think that all it is going to take is "just one more" indicator before the path to financial freedom becomes clear and apparent.
Surely, we need indicators to trade; don't we? The answer to this question is a resounding "Yes!" I am not suggesting that the use of indicators in trade analysis is in any way redundant or bad. After all, each indicator was developed to work in different market conditions and with different asset classes.
The question now becomes, "How many indicators are too many indicators, and when should we use them?" I have decided to answer the first question with a pictorial reply. When your computer screen looks like the screen shown below, you know you have a problem!
Any trader with half a brain could work out that, by using all of these indicators, I was not only trading counter-productively, I was heading straight for analysis paralysis. For each indicator that forecasted a bullish rally, I had two more forecasting bearish. Strong momentum on some was also showing a weak reading on others.
Sure, the chart was bright and exciting, but could I really trade this stock? The answer was "No!" I had complicated my trading and technical analysis to such an extent that I could no longer perform the relatively simple task I had set out to perform. Where was the stock going?
So, I did the only thing I could think of at that moment: I closed down my trading platform and made myself a cup of Earl Grey tea. When I turned the screen on again, I started right back at the beginning - that blank trading screen with basic stock bars on it.
I had to reprogram my technical analysis and stop looking for that final magical indicator that would predict the future. It doesn't exist. I have spent years searching for it only to realize that I was my own worst enemy.
So, what is the best indicator? The short answer is that there isn't one. Each and every indicator was developed for a different reason, for a different time frame and a different asset class. You need to work out what you are trying to predict in both direction and time frame. That is a pretty good starting point.
If I can give you one piece of advice, it would be to start simple and try to stay simple. Find two or three indicators that seem to work for you and perfect your use of them. If nothing else, your screen will never look as though you have taken a plate of spaghetti and thrown it at your computer. Also, your sanity should stay intact, and you will enjoy your trading for a lot longer, just as I now do!
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