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Trading Education Posted by Team Topstep January 25, 2021

Knowing Which Trading Indicators Are Right For You

Trading Indicators

At the age of thirty-six, I would hardly consider myself an old veteran of trading. However, my exposure to the markets at an early age taught me some valuable lessons about trading indicators. I began as an intern the week the U.S. went to war with Iraq in 2003. Furthermore, for much of the last ten years, I’ve worked in the retail industry and watched many traders attempt to leap to professional status. 

I’ve met traders who were so-called “Google experts.” They had found so much data on the internet regarding the history and usage of indicators it was unbelievable. However, the unfortunate reality was that this information did little to nothing to transform them into consistently profitable traders.

The Next Big Thing!

Frankly, I’ve seen trading indicators, signal services, and even brokerage houses come and go as many people gravitate to the next “new thing.” One observation I’ve made comes by way of a story concerning a colleague I’ll call David, an astute young trader. About 7-8 years ago, a developer created a new indicator that gained popularity. I noticed that David had worked with this indicator for about six months, seemingly becoming an expert on all the ways it was to use it. 

Finally, David broke down and informed me that while he knew enough about this indicator, to the extent that the provider wanted him to teach it to new traders, he had never made consistent money with it. And, even with an inconsistent track record, he remained dedicated to using it. I asked what the point was? His indirect answer was that he knew it was a goldmine because it was still so new. It took a certain amount of sophistication to perfect it, and once he did, it would be an automatic money maker. 

I knew precisely why the developer wanted David to help sell this product. Because they had done such a good job selling him, he had become a blind and loyal soldier. Did other people make money trading this indicator? Absolutely, but the only money David made was for the benefit of the developer. 

I’ve seen new trading indicators and some faddish behavior surrounding these products that gain quite a following and treat the teacher like a celebrity. I will attest that I have benefited from learning about some of these new things. However, the glamour of the fresh approach is no substitute for profits. 

Old Dogs and New Tricks

Suppose traders are prone to be attracted to the bright lights of new services. In that case, there is another segment equally drawn to old indicators, believing that they can revolutionize existing products. I’ve seen it many times; a trader has a new approach to moving averages, MACD, RSI, or any number of methods. 

One such story is when another young trader found Point and Figure (PNF) charting and began asserting that PNF charts are a great way to remove market noise. He did have an excellent two-week winning streak, but after a month, I noticed that he used the PNF along with other range-based charts and time charts. In short, PNF was not the game-changer he initially expected. 

The same goes for other indicators. For instance, in my early years, one trader told me that specific settings on the MACD were the sure-fire way to easy profits. I used his settings for a week and then trashed it. 

What’s My Point?

Some traders have perfected the old school MACD and can make a good living using it, while others found the perfect modern trading indicator and are now living their dream life. However, my point is, just because it works for them does not mean that it will work for you! Different personalities see the markets and interpret indicators in very different ways. Just because somebody else found their way usually does not mean it will be easy for you to pick up their methods and follow, especially without any adaptations.

Know Yourself

I love Sun Tzu, and his sayings can be adapted to trading very easily. For he says: “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” and I often substitute the word markets for enemy and trades for battles. Therefore, “If you know the markets and know yourself, you need not fear the result of a hundred trades.” Corny, right? Yes, but it is also very accurate!

The idea, when applied to the earlier content, is this. If anything, traders must be perceptive people to filter all the market and media noise. This perception also applies to self-awareness. There are many different ways to assess personalities, but I often narrow it down to two, at least in terms of traders, and I think this is a right-brain vs. left-brain kind of deal. 

First, there are very scientific people. These tend to be mathematically astute as well as methodologically consistent. There are many advantages to having these strengths in trading, as you already realize. Perhaps, though, one disadvantage is that these people do not tend to adapt quickly.

Meanwhile, there are others whom I consider to be philosophical people. Rather than being mathematical and scientific, they tend to be artistic, have a sense of feeling, and be very flexible. However, with all of these potential advantages, they tend to be too adaptable and less systematic, which can be detrimental to trading. 

Again, My Point?

The purpose of this information is that the indicators and strategies that appeal to one personality may not appeal to the other. Of course, being successful and growing profits appeal to any of us. Still, particular strategies and specific indicators tend to utilize either one side of the brain or the other in my assessment.

There are ways to strengthen your trading personality, which will be an excellent topic for an upcoming article. But for now, the idea is that some indicators may work great for one person and not the other. Very much for the same reason why a friend of mine went to Yale Law School and hated law, but loves to work on cars. 

The challenge becomes, how do you do a self-assessment and then choose an indicator based on your strengths? Well, that is just as subjective as individual personalities are. It would be challenging for a right-brain person to guide a left-brain person into particular trading mechanics. 

However, I’m not going to leave you hanging. This article will be the first in a series of at least two designed to help all traders develop an approach to using indicators. 

Add Pitches to Your Arsenal

Every so often, a Major League Baseball pitcher comes along who has a fastball with high velocity and good accuracy. However, the problem is that their remaining pitches are subpar and hardly used. One primary issue is that a pitcher can only throw so many fastballs before their arm gets tired. When this happens, opposing batters will start to pick up on the pitch timing. Therefore, these pitchers must learn to develop an offspeed pitch. If not, they will be delegated to the bullpen, where they will have a more limited role. 

No matter your personality, it is essential not to rely on only one trading pitch your entire career. Because, eventually, your arm (or strategy) will have a day when it is tired and less useful. Or, opposing batters (the markets) will have your pitch delivery just right. For this reason, it is crucial to not depend on a single indicator.  Traders must develop at least one more pitch to use at critical moments. 

In the observations I have made over the years, nothing works the same over the long haul. Financial institutions employ math quants to help develop algorithms because each system must be continually improved upon and adjusted. I knew traders who depended on that one fastball when their indicator just didn’t work the same. Rather than going to an alternative method, they kept just trying to throw harder, hoping something would work. Whether we are talking baseball or trading, we can permanently damage our trading arms when we keep trying to push harder. 

Stay tuned as I continue to add to this topic in the weeks to come. Until next time, trade well!

By: FairValueTrader