Many traders and investors are looking for the secrets of trading success. They think if they just had one more indicator on their screen or personal access to that secret algorithm used by Goldman Sachs, they would achieve their goal of financial riches.
That is why I find many new traders and investors place a great number of indicators on their charts. Most of the time, these traders have absolutely no idea what mathematics may be behind the indicators and very little knowledge of how the indicators should be used in their analysis. A little bit of knowledge can be very costly.
As an example, I placed the moving average, the directional movement indicator, and the commodity channel index in the chart of the SPY above. These indicators are available on many charting platforms. All three can be used to determine the trend of the market, if applied correctly.
But a trader does not really need all three indicators on his chart. Instead of confusing himself with the interpretation of all of them, he would be better off becoming an expert in one.
This is even truer when a trader places many technical oscillators on his chart as shown above. While each is composed of a different formula, they still generate a very similar expression of market momentum. Just remember that as the trader places more and more indicators on his chart, he is increasing the chances for self-doubt, over-analysis, and confusion. The end result is losses.
Many traders would be amazed to find that professionals have very few indicators on their charts. One may be used to help define the trend; another is a reliable momentum indicator, and a third to assist in money management of the position. In fact, there are many extremely successful traders who have no indicators on their charts at all. Why? All indicators are derived from price. It is the price movement that matters most.
For decades, new traders have struggled in price analysis and managing their stock selections through the use of technical analysis. Many times it is because they are looking at indicators they have placed on their screen and, in reality, they have no clue what they are looking at. Be selective in your choice of the indicator and take the time to learn how to use it.
Senior Instructor at The Weiss Center for Investor Advancement
P.S. Want to learn more about how to recognize a big trend by analyzing charts and daily prices? Starting Feb. 24, I will be hosting a three-part course designed to teach investors just like you about the most common technical indicators found on almost every charting platform. Being able to spot these trends can help reduce losses and gives you the potential to generate higher returns. Click this link today to sign up for this informative course presented by The Weiss Center for Investor Advancement.