All you want to know but never asked about the stocks and options markets.

martes, 5 de abril de 2016

Do You Have to Use Indicators in Trading?

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Many traders feel compelled to use indicators to anticipate the movements of the stock market, but often, this can backfire. While some traders find that indicators fit their trading style, many more are confused and upset. In fact, many successful traders have abandoned the use of indicators completely, and now choose to focus only on the price and volume information.

The problem with trading indicators

While there is much debate about whether the indicators just get in the way and in fact are useless - and we will not discuss each side - the fact is that unless you take a very disciplined approach to the use of indicators, price charts can end up looking like a plate of spaghetti. The situation may also deteriorate over time, as you add more and more indicators to try to refine their signals. This not only makes the charts incredibly confusing, it also can generate mixed signal, leading to indecision and ultimately to paralysis.

Trade only with price action

Instead of relying on the indicators, you can learn to read what the charts are telling you directly. This will not give the same precise signals obtained with indicators, but trading is not an exact science. At best, the indicators show what the market can do - but no trade is sure to produce a profit. When ypu trade using price action, you learn to accept and even welcome ambiguity - which makes you a better and more realistic trader. It also allows you to keep your trades simple, making it easier to make decisions and avoid mistakes.

What are the key elements to trade with price action?

First, it is important to learn to identify support and resistance levels. While indicators can give these levels, they create a false sense of security as they signal an exact price level. When we trade using the price change, the goal is to identify areas of support and resistance - these are the areas where support and resistance will be met - not the exact prices. This is a more realistic view of support and resistance - allowing you to make better trading decisions.

The same basic principle applies to the identification of oscillation points or swing points. Again, these should be viewed as areas rather than precise prices on the chart. It is also important to consider the history of oscillation points - for example, it makes no sense to buy on a pullback if the area of the previous swing was near the area of oscillation of this pullback - simply is not enough room to make a profit.

You also need to pay attention to the candlesticks. The candles which have a wide range indicate that confidence is probably changing. Moreover, very small candles tell you that the momentum has slowed - and an explosive outbreak may be imminent. This is no different to seek low volatility with Bollinger Bands - except that you are trading with the current price, rather than a lagging indicator, meaning that you will realize the opportunity before.

Follow price action itself will also allow to detect key trading opportunities. For example, it is easy to find when a price level has been turned down - just look for a long pin which was not followed. You can also easily see how deep is a price swing - for example, if the price has fallen more than 50%, then there is a distinct possibility that a trend is over and it is not just experiencing a short-term correction.



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