Indicators

Everybody searches for that perfect indicator, yet most have little
understanding of what indicators actually do, how to pick one or
even how to calculate one. To see the logic behind an indictor try
hand calculating a MACD or a Stochastic.

One of the reasons why indicators are misleading, is down to the
settings. In a normal setting of a Stochastic the signals are given by
crosses of the 20% and 80% lines. Depending on the settings, you
get many different signals. Test this yourself on say a: 5-3-3 Simple,
13-3-3 Simple, 21-14-7 Simple.

Indicators serve only one function and that is to smooth the price.
All indicators use a mathematical process to make price easier to
understand. In some cases they create a DIVERGENCE which gives
you an early indication of a market turn or flattening out. This is certainly the best use that I've ever ever found for an indicator.

Indicators were originally developed to be used on the DAILY price
action of stocks. Hence, using them on intra day prices, as a signal,
can lead to untold problems if the indicator is not clearly understood.

Using a MACD histogram to give you an indication of when a market is flattening or changing direction (due to price divergence) can be beneficial. When used in conjunction with an SMA on different time frames, a profitable trading system can be developed

I know that there are people who do use indicators for their trading
decisions, however more often than not they still use a price pattern
as a primary signal and the indicator as confirmation.

INDICATOR BASICS

Indicators...
- Smooth price fluctuations
- Alert, confirm, predict price moves depending on settings.
- They can be lagging, leading or concurrent.
- The time period used for the indicator is important.
- Multiple time frames provide better accuracy.
- Concurrent time frames and indicators give the best signals.

Picking Indicators
-Use a maximum of five indicators on any chart ( less is better).
-Do not use co-linear indicators that measure the same thing.
-Use both leading and lagging indicators.
-Include Long term, medium term and short term.
-The trade offs are consistency verses sensitivity.
-Maximum profit versus minimum whipsaw.

If you were an indicator trader then you would need to use a
collection of indicators for your trading signals. Your selection
would be made up following these guidelines:

1) You would use a combination of leading and lagging indicators.
2) You would use a maximum of five indicators of different types,
but with similar time frames. You would choose one indicator
from each category....

-Trend Indicators: MACD, ADX, Moving Average Systems.

-Volatility: These measure the day to day price magnitude
fluctuations: Bollinger Bands, Envelopes, Kelther Channels.

-Momentum: These measure the spead of price movements:
MACD, MACD Histogram, Stochastic, Relative Strength,
Williams%R, CCI, RSI.

-Cycles: Many securities, especially commodities, indexes
and currencies have cyclical patterns: Fibonacci Retracements,
Fibonacci Time Cycles, Pesavento Patterns.

-Market Stregth: These incorporate either volume or open interest:
Volume, On Basis Volume, Money Flow, Advance Decline, TRIN,
TICK, TIKI.

-Price Action and Patterns: Inside and outside bars, gaps,
turning points, reversals, certain Pesavento Patterns.

You would avoid multiple indicators using the same data. If all
your indicators only use price and calculate a smoothing function,
then the co-linearity will give false signals.

Since most indicators are simply variations of the same principle,
you would need to find two or three which you understood fully
and use those in your trading system.

For a trading system which was created by testing every type of indicator on every conceivable time frame, then you should take a
look at this Futures Trading course. Futures Trading Secrets
Would I recommend it? No! It's not that the course is of no value,
it's simply that I have not purchased the course hence I can't give
you an objective opinion.