Market Indicators

[Joe Ross]

This question was sent to me from one of our students: "Hey Joe! What market indicators do you feel are the best to use: Moving Average, RSI, Bollinger, etc....? I realize there are many other considerations."

Oh boy! There was a time I used indicators as my main tool for entry signals. However, these days if I use one at all, I use it only to show me something I can’t see or to support what I see with my own eyes on the chart—trade what you see!

However if you are going to use an indicator, then prior to making the choice the most important thing to consider is your time horizon. How many bars in the basis of the indicator gives you the highest percentage of accuracy? You need to build a huge amount of evidence before actually making the trade or believing in the signal. Try to use two non-correlated indicators such as the fast Stochastic, and Bollinger Bands, to see if they support your thinking on the trade. If they don't confirm the trade, stay out. By non-correlated I mean they measure two different things. Stochastics measure momentum, whereas Bollinger Bands measure volatility.

Do not attempt to do short-term trading, along with position trading. Since potential gains in short-term trading are so limited, the risk controls have to be very tight, so your indicators have to be much sharper.

The most important thing to remember about technical indicators is that they were never really meant to be "stand alone" indicators. The nature of things prevents a "Holy Grail" from being possible. Indicators can be part of your trading method, but not your entire trading method.