Indicator Day Trading

So, when you started trading, did you start as an indicator trader – maybe even thinking that you had found something that no one else knew about? Why was it always so convenient to forget that if it was that easy, then all traders would be rich?

I know this is how I started. Actually, when you think about it, this is quite logical considering you just got that charting program that is jammed packed with indicators. After all, how else are you supposed to start, besides using those histogram color changes and squiggly line crosses as signals?

How Long Did It Last

Well, it didn’t take me long to find out that this was not going to work. I didn’t then start buying any indicators or systems like many people do, but I did get involved with a trading group that also included a signal service AND that didn’t work at all either – now what?

Probably, the single most important 'thing' that got me to a next step in learning how to trade was the concept of a trading setup, and that a setup and a signal were not the same. This was extremely meaningful to me, as it also led to an understanding of how to better use trading indicators for the information that they can provide, but not to use them as trading signals - in essence, I began learning about trading method.

Traders that are indicator only traders are also what I refer to as right side only traders, this to say that they are always looking at the right side of their charts for a signal. BUT what about the left side of the chart, what about price and patterns, what about market conditions - WHAT about the relevant 'things' that are 'moving' price, instead of indicators only?

For instance, consider this chart and the yellow dots as an example of indicator signals in consolidation, and what happens in a meaningless range. If I traded the indicators only, which would have triggered at the yellow dots, then I would have had 5 trades – do note that our method does have what we call a consolidation base setup, however there were not that occurred during this period.

The last yellow dot would have given a winning trade, but who would have taken all of those yellow dots and had 4 immediate losers that never came close to giving a partial profit, and would have taken a 5^th trade that was no different than the first 4?

Chances are that you know that trading psychology does lead to some out of control over trading – where does it come from – I would suggest that indicator signals are certainly in part responsible.

Saying that I am not an indicator trader is not the same thing as saying that indicators aren't valuable or useful - it is saying that their value comes from trade setup information instead of trading triggers.

So why use indicators at all, which is a question that I have been asked numerous times – why not just trade setups?

Looking at this chart you can of course see:

(1) There is a profitable sell swing, but where-when-why would you have entered the trade?

(2) Is that the only trade that you would have taken on the chart - is it even possible that you did a sell at the beginning of the chart, got stopped out, and never went short again?

(3) What about the end of this chart – should you now be long-short-flat?

You can see that I don’t have the indicators on the chart, but the yellow dots are where they would have given signals – there would be 4 trades with the first 2 being losers. Then I can see the case where someone selling yellow dot3, and immediately having it go against them, would have exited that trade and then never be short for the winning sell.

I think that the primary weakness for indicators is when they are used as signals, consider the following situations inherent with signals:

(1) They ignore market conditions – meaning that an indicator can trigger in consolidation-with market direction-against market direction in the same way.

(2) Indicator signals ignore price both for entry, but also for what is being traded into. I want to enter a trade with what is called a right side failure of left side price, while avoiding entries that are directly into that left side price – indicators only would not include either of these.

(3) Indicators will over trade in consolidation, as the market keeps reversing back and forth in a meaningless range.

(4) And maybe as problematic as any of the weaknesses, an indicator signal gives only one entry. This means that if an entry is missed for whatever reason, there is no way to trade the same swing, and it will be necessary to wait until the next signal.

I have no issues with using indicators for trading, and in no way do I feel that my trading, or myself as a trader, is diminished by using indicators – contrary to the attitude that some ‘gurus’ take. Of course I am not a ‘guru’ that could tell you that I was able to sell the high on the chart, oh well, back to method.

Indicator strengths come from the information that they can provide, allowing for the reading of charts faster, and giving the direction and timing of the next trade; this is what I think of as chart mode. So we don’t use indicators as signals, but we also don’t trade against them or have setups that would give a sell when the chart is in buy mode, or give a buy when the chart is in sell mode – I will define chart mode when I discuss the indicators.

The yellow dots are the locations of where my trading indicators would reverse, and the blue line is a method price component for a possible trade setup. So while in sell mode, the red dot is the entry timing for a price failure break, and while in buy mode, the green dot is the entry timing for a price failure break – answering the question on the previous chart as to whether you would be long-short-flat at the end of the chart, in this case the buy would have been a reverse of the red dot sell, after the indicator reverse.

Here is a video that discusses using indicators for day trading further - specifically talking about using trading indicators, as trade setup information, in a day trading method: Trading Indicator Training Session