I started out the journey using Technical Analysis, believing that the more complex/advanced an indicator is, the more useful it will be for predicting the future movement of the markets. Heck, I even believed that if I could invent my very own custom indicator, it would be more accurate than all the existing “old” indicators.
How wrong could I be?
After clearing the mountain of reference books to obtain my CMT (Certified Market Technician), and this was before they condensed the reference materials to a mere fraction after too high failure rates at CMT Level 3 (yes it’s worse than CFA!), I realized one truth.
The simplest indicators work the best. Or no indicators, just price action will do. That works wonders.
Why, you may ask? Simply this: Technical Analysis works these days because it is a self-fulfilling prophecy. Take for example, if the prices breaks upwards through an established downwards trendline, many chartist will see this as a potential breakout on the upside, and could possibly signal the start of a new uptrend. And it is much easier for even a layman to draw a trendline as opposed to using a complicated indicator. And as more eyes are seeing and believing this potential uptrend, more buying will result. And this, will move the market prices up further, simple as that.
As they always say: KISS – Keep It Simple & Straightforward.
Below are five of the indicators that has worked fantastic for us. Simple and elegant, they often tell a much better story than many overly-complex indicators.
Yes, the good old Moving Averages. It comes in two variations: Simple (SMA) and Exponential (EMA).
In the past, the common periods used for Moving Averages was 20-period (short-term), 50-period (medium-term) and 200-period (long-term). We often use EMA for shorter periods, and SMA for the longer periods, as EMA reacts faster to new price movements. These days, many different periods are getting more effective other than the 20/50/200 set, which is partially the result of everyone second-guessing each other.
The crossovers of different moving averages often signals buy/sell opportunities. They are however seldom used alone, and often used in conjunction with other indicators or price action strategies.
Originally designed to be both an entry as well as an exit signal, it had been notoriously known for its inaccurate entries when used alone.
However when used as part of the exit strategy, it works even better than a mere trailing stop loss, and is simply fantastic!
If you are still using normal or trailing stop losses, I will strongly urge you to give this a try.
ADX – Average Directional Movement Index
If you need a barometer which tells you how “trendy” the market is, this is that one indicator you need to know.
A simple yet extremely effective usage: If you are using a trend-trading strategy, every time when you make a profit, take note what the ADX value was when the position was opened. You should start to see a certain pattern after some time. Use that knowledge and further enhance your trading strategy, I am sure it will increase its effectiveness.
ATR – Average True Range
The measurement of volatility. This indicator is widely used to determine how volatile the market is, and is also known to be very useful as part of the calculation of position sizing.
If you have yet to get acquainted with ATR, take a look at it right now and see how you can incorporate that into your trading plan.
I know, these are NOT indicators I hear you say. Then why are they on the list?
Although trendlines are simply drawings which you connect two or more lows (or highs), and you don’t find them under the list of indicators, they are one of the BEST tools a chartist has to determine the current trend, as well as the next potential incoming trend. And they indicate the trend, don’t they?
I have always urged anyone who is new to Technical Analysis to learn how to draw trendlines in, and properly. Once drawn in, a break of the trendline often signals the start of a new trend. This has often helped new traders to see how just a simple tool can work wonders to their confidence and account equity.
I’m sure this has helped you understand more about indicators. Do check out the rest of our articles on algorithmic trading here:
How to differentiate good trading systems from the rest?
Ways you can manage your risk using automated trading strategies
Do also check out our preferred broker IG (click here). Listed on London Exchange, they are among the largest forex and CFD brokers worldwide. We are currently running our algorithmic trading systems on IG live accounts, performance can be seen here: myfxbook – GS Alpha Bundle Portfolio