Indicators

Question from a trader: Joe! I'm not a very creative person, so I tend to use indicators to help me in my testing. I've heard that you are vehemently against indicators. Is that true?

Not true! I am not vehemently against anything that works for you in the markets.

I am not vehemently against the use of indicators. I have presented many of them in my books.

What I am against is the wrong use of indicators as well as the blind use of indicators. Indicators have been hyped far too much than is realistic for their values. They are not predictive. They are not the "be all to end all."

Creativity involves making something only 10% better than its present condition. Newton combined Galileo's terrestrial laws and Kepler's celestial laws and expressed them with his new mathematics of derivative calculus. Newton later created the Law of Universal Gravitation from the work of Kepler and Galileo, when supposedly watching an apple fall while observing the moon. Newton immediately realized the force of gravity holds the moon in position just as it pulls the apple to earth. The apple exerts a force of gravity as do all other objects as well. The same creative process may be used by traders applying filters to systems to reduce the number of trades and make signals of higher quality. ADX, stochastic D line and Bollinger Bands are three of the best indicators that offer a good starting point for testing. When the five-day Stochastic D line is above 70, a short term top is due; below 30, a short term bottom is due. But note I used the word "due." There is no guarantee it will happen. An indicator can be overbought or oversold for days and weeks, during which time it is wrong, wrong, wrong. Oscillating indicators can fall apart at the seams when a market is trending. You must also be aware to not use correlated indicators to confirm one another. RSI, Stochastics, MACD, %R and others are all correlated in that they measure momentum. Naturally, they will agree with each other most of the time. They are not confirming, they are agreeing!

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Master Trader Joe Ross wants you to learn trading and he created products to do just that, teach you how to trade. Go to our website to find which ones best fit your trading style.