How to apply technical analysis indicators correctly? How to choose from a variety of indicators? What you need to understand and know about the indicator?
To many traders, an analysis of technical indicators seems like a holy grail. Like, if the classic analysis didn’t work, then the magic complex indicators will definitely bring profit. After all, they are built by a computer, but the computer is smarter than a person.
WHY AM I, BURENKA, SELLING YOU?
But from the first day, when I found out about technical / computer indicators, I was always amazed, but why do their creators sell cows that produce tons of milk?
For me, the answer is simple, in fact, in a standard layout, and with standard use, indicators are not able to give more money than the methods of classical technical analysis.
They are good for those who expect a modest yield of 30-40% per annum (excluding the credit “leverage”, which can be taken on the “long” only with the “short”), but to whom the visual analysis is not convenient.
Someone will say: “Eh … I would have such modest profitability …” Someone would be surprised to use indicators and wait for millions of percent per annum and be cruelly deceived?
Let me reconcile everyone. And I will give some simple tips, not even because of how to optimize indicator strategies, but because you first need to know about them. In my experience, a huge number of people trading for years over indicators do not perform basic safety techniques for dealing with them.
SAFETY PRECAUTIONS FOR TECHNICAL INDICATORS
EVERY CRICKET KNOW YOUR SIX
Before using indicators, first of all, it is worth calculating whether the average number of signals per year satisfies you.
Most of the losses from stockbrokers are not due to poor indicators, but since they take indicators with rare signals. And between the signals, traders manage to make thousands of intuitive transactions.
It happens, and vice versa, the investor chooses the wrong time frame or indicator period too short, does not have time to make part of the signals, or filters them artificially altogether, and the result is deplorable because good inputs and outputs are missed.
Why don’t people count the number of signals before they start using indicators? So many people simply don’t know and don’t know what to do. In beginner courses, the teacher gives them a grail in their hands and says: “Use it!” Bad teacher? No! It’s just that not everyone hears about the time frame, about what papers the indicator needs to be applied on. The market is undeniably self-similar, but this rule extends to classical technical analysis. Indicators of technical analysis are often created for some tasks.
Tip: Look for the full paper history of the time frame you need. As long as you do not have it in your hands, you will not have peace of mind and confidence in your indicator system. Unfortunately, slices less than a day in this format, even on Russian securities, have now become paid. But it’s better to pay for quotes than this money or lose big ones. Losing is very pressure on psychology!
KNOW WHO STARTED THIS ALL!
The second item immediately follows from the first. It is necessary to strictly imagine who created the indicator and why.
Oh, how many troubles could have been avoided if the J. Wells Wilder Jr. indicators were used on highly liquid securities, subject to a special risk management system wilderness! No matter how much money people lose, if they stopped using Bollinger Bands in papers that are not subject to news and do not react sharply to them. The era of prosperity and wealth of traders would begin if, at last, they reunited the broken system of Bill Williams and ceased to separate his indicators and use them separately.
Tip: I will not trade on an indicator whose creator I do not know. And I do not advise you! By the way, this advice applies to classical technical analysis. For example, I do not trust some figures for technical analysis. This distrust allowed me to learn about the “Hound of the Baskerville” effect, on which you can earn twice as much as on any figure.
And if you return to the creators of indicators, did you know that you can get acquainted with some of them almost personally. The business of selling computer indicators is young and the creators of many are alive, thriving and have sites.
BE REALISTIC, DEMAND THE IMPOSSIBLE!
As I said above, many traders expect from indicators not what they can do. And this applies not only to the number of signals but also to quality. And simply put returns!
If we take a slice of the day and the longest history of a Russian stock in twenty years – an analysis of the profitability of the “on the knee” indicator can be done in about thirty minutes. We don’t even need Exel or a calculator, the counting function of the Tranzaq trading terminal is a “line”. Using the program’s ground for the construction of trading robots, we can process 5-10 papers in twenty minutes. And all this is available to any trader.
Tip: Check the history of the profitability of all past signals, play with filters and criteria for their receipt, note the signal strength on rising and falling trends. By the way, this advice is especially important for our market, since there is a large list of securities that is not subject to an objective market law stating that stocks are always growing. The market is always growing. And individual stocks may arrive in deep downtrends.
HAVE AN OPINION ON THE CLASSICS
In the last piece of advice, I involuntarily crawled back to the topic of classical technical analysis. Because I believe that while the trader has not been convinced that this method is inconvenient for him, it is not necessary to run to the indicators. And also, not understanding what the main movement is now, it is difficult to read the indicator signals. The combination of trend-following indicators can partially remove this problem, but I believe that it is necessary to dilute your charts with classical technical analysis.
The fact is that it is a classical technical analysis that can more quickly suggest the presence of a systemic exchange problem, crisis, etc. Indicators will begin to lie first, and then they will adapt to circumstances for a long time. You say: “So you look from your bell tower in the medium term. Inside the day you can only trade on indicators! ”Maybe, but I have not seen a single system specialist who would not want to knock out his robot, waiting for a post-New Year or dividend“ gap ”.
Tip: The more justification there is for making a deal, the smarter it will be. Look not only at yourself, do not think only about your comfort – turn around to the crowd.
THE VOICE OF THE CROWD
Speaking of the crowd. Many novice traders who undertake to analyze the market with the help of indicators spend a lot of time choosing their parameters for them. They come up with simply unimaginable periods based on moon cycles, news, favorite numbers. Everything is much simpler, the stock crowd does not bother like that. There are generally accepted tricks and at best traders try to apply them. And at worst, they don’t even know that they need to select any parameters there. Seriously, many of the indicators on the charts are for beauty only.
Tip: Find out what parameters and for which time frame the indicator creator himself recommended. Please note that most likely the daily slice was taken as the time frame, and, based on this standard, start testing. Also, do not disdain the views of the forums, ask your colleagues about the indicator you are interested in, what parameters they like and at what interval. And then start the game of filters, clear stop-losses and thoughtful risks!
CATCH THE ESSENCE, NOT THE FORMULA
Many traders are afraid of indicators because they have scary formulas. In fact, if you try to understand the physical meaning of the indicator, the world becomes easier. How to understand him? Above, I told you that you need to get acquainted with the creator of the indicator, understand what he wanted to say by the indicator. Sometimes, when this is not possible, good books will help you. For me, this is the book of Robert W. Colby’s “Encyclopedia of Technical Market Indicators.” She not only talks about the types of indicators but also teaches what data set you should have on hand before you start trading on them.
Tip: If you can’t make a final conclusion on the indicators, because you don’t understand any nuances about them, look! Books, articles! Take someone else’s experience! Everything needs learning and always. And then you can step beyond the standard opportunities for profitability indicators.