Know the Limitation of These Technical Indicators!

The number of technical indicators that are now available in technical analysis is huge and large. Now every trader narrows down the list and in the end only trades with two or three technical indicators most of the time. These two or three technical indicators give them a certain comfort level in making trading decisions.

Most of the indicators are lagging. What lagging means is that they use historical data or past data to give a signal. So, most of the time when the signal is given, the market has already moved ahead. So the effectiveness and reliability of lagging indicators is limited. You need to understand this fact. What you need to learn is the strengths and weaknesses of each indicator that you intend to use in your trading. Because, sometimes, the signal generated by the indicator may nor be reliable at all. So blindly taking it as a trading signal may turn out to be foolish later on. But if you know the weaknesses in an indicator and can understand under what conditions this indicator does not work, you will be more safe in your trading. Now, let’s discuss a few broad categories of technical indicators:

Average Based Indicators: Average based technical indicators are the most simple to use. These average based indicators are widely used by traders in almost all markets whether it be stocks, forex, futures, options, commodities and others. The average is calculated on the past data depending on the time frame chosen by the trader. This is a typical lagging indicator that trails the market. This indicator cannot look ahead and anticipate. So, you need to use it in conjunction with other indicators. A combination of lagging and leading indicators can give highly effective signals. But always keep this in mind, there will always be some room for error with these indicators. level indicator

Fibonacci Based Indicators; These indicators are very popular and are being used wiodely by all sorts of traders in their trading. These are real leading indicators that can look ahead of the price action and anticipate the new direction of the market. Fibonacci Retracements, Fibonacci Extensions and Fibonacci Projections that the three type of indicators that are used widely by traders. But even this is an art. Some trader become experts in making sense out of the Fibonacci levels otherwize never learn how to master these indicators. Combination of Fibonacci and Pivot Point Trading can be very powerful. Now, when a lot of people start using the same thing. Markets tend to reflect that thing and it looks as if the markets also do believe in such things after all. Just remember, markets are just people buying and selling. These overbought and oversold levels are just the reflection of the emotions that people show in their trading. So, markets also believe in what you believe!

Trend Based Technical Indicators; Trend based indicator is one of the simplest. It is formed by drawing a ling that connects the high highs in the price action if it is an uptrend or the low lows in the downtrend. Trendlines can give you an important clue as to the support and resistance. There is something even more accurate than the trendline. It is the trend wall. You need to know all this stuff if you are really serious about learning trading.

Chart Patterns: There a number of chart patterns like the rectangles, triangles, flags, parallelograms and other that are also used as indicators. Most of them are however inaccurate when used solely. You need to learn how to use them in conjunction with other indicators if you want to rely on them in your trading decisions.

Leave a Reply

Your email address will not be published.