4/17/2010Stop using standard indicators:
Most of the time when a trader is new to trading they will have someone tell them to start off with a standard slow stochastic, fast stochastic and MACD all with the standard settings. Also they are usually told to have up 2-3 moving averages, maybe a 9, 18 and a 30 or somewhere in that range. Or a 50 and a 200 on a daily chart and for some reason everyone does this at the start of their trading career (me included).
But Guess what? They don't work!
If those standard indicators worked you would have already mastered the markets, making all the money you could ever want in life. The mansion you want to live and a different colored Ferrari for every day of the week.
In the real world outside of trading if you do something and lose money you don't do it again or at least try to avoid the same situation because you have learned the hard way. When you were 5 years old and your mom told you not to put your hand on the hot stove guess what? You probably did it anyways but as soon as it burned your hand you knew right there and then to never do it again. But in trading people repeat the bad mistakes even though they know that the strategies they are using do not work. You might think "maybe it will work this time". Right here and now stop putting your hand on the stove over and over and learn how the market truly works. Why would you want to keep putting yourself through that pain , financially and emotionally.
Let's take a few minutes to look at why most standard indicators do not work and why you should get them off your charts starting right now!
We know the market is either contracting (making a smaller range) or expanding (making a bigger range). Also we know that the market is either making a impulse move or it is correcting the impulse move.
So knowing this we can look at the markets in a logical way with the indicators and let's do that now:
Stochastic:
If you are trading with a fast or slow stochastic it is normally measuring the last 14 or 7 bars. So when the market is in a contracting start for 3 hours YES the stochastic might have a little value calculating the high of the range and the low of the range. But as soon as the market breaks out of that contracting start and starts to expand guess what? The stochastic indicator will get pegged above 80 and that is where most people are taught to look to short the market because it is getting "overbought". If you short the market when the stochastic is above 80 when the market is expanding you will lose money 99.9% of the time , so why would we do that? We dont!
The same goes for if the market is expanding to the downside the stochastic will get blow 20 and stay there , but most people are taught to but there because the market is "oversold".
Conclusion on stochastic:
Not only will you be looking to short a breakout long you are actually missing the trend trade and that is where the big money is made. So instead of looking at this indicator get it off your charts because it is only valid 25% of the time and that is not good enough odds to make money in the markets. You will lose more money and confidence in yourself using this indicator so the negatives outweigh the positives so get it off your chart!
MACD Indicator
MACD is probably the most popular indicator but the MACD can get into divergence state for much too long and trying to trade a MACD cross will lead you to entering the trade to late or too early on 95% of your trades. A divergence is when the indicator is going lower but the price is going higher and most people are taught to short a positive divergence.
Yes, there is some value in using the MACD but that is to confirm a trend trade. So you must know how to read the patterns to know if the trend is up or down then use the indicator to confirm a second entry trade (we use the Turbo Scalper System for this).
If you use the MACD without knowing the true trend the MACD will give you 60-70% counter trend trades. And your job as a trader is to know it is counter trend and skip those trades.
We always say that indicators are there to confirm the patterns. You must know the pattern first and know the entry zone on the pattern then use the indicator to confirm the entry zone. We have made our proprietary set of indicators to clean up your chart and to give you the highest odds entry bar. Instead of you trying to predict the entry bar in the buy zone ours tells you the exact bar to get in once the pattern is confirmed.
Check out the chart on this blog and you can see the tight stops for huge rewards. We always know the risk on every trade before we enter and we also know our profit targets before we enter the trade. This is valuable on multiple levels to know 1) how many contracts to trade 2) and where to take profits at the highest probability profit zone. Look at the chart and ask yourself if this would help you with your trading? There was $4200 worth of opportunity on the short side. At minimum you would at least know instantly not to go long against our short signals.
Contact us to learn more at trade@eminischool.com or go to the site to see more charts.
Conclusion: Keep your charts clean and take off what does not work, so you can get the bad habits out of your mind when trading. Do not think you have a edge using standard indicators you simply do not. Everyone gets all these indicators for free and if they worked you would already have mastered the markets!
Happy Trading,
www.eMiniSchool.com
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