No tool or indicator performs well in all market conditions. The plethora of indicators/tools have merit, yet they all have faults. Thus, it is imperative that each of your indicators have a purpose. They should reveal solutions for a variety of market conditions. Necessary indicators: bull, bear, neutral, reversal, speed and resistance/support.

An overload of indicators leads to conflict, and confidence is lost when conflict reigns. Trading is challenging enough, so we must utilize tools that serve a specific purpose.   

An Epiphany

A few decades ago, I read a book called “Markets and Market Logic” by Peter Steidlmayer. I also attended his Market Logic School. This new knowledge and my experience in the trading pits formed a foundation for developing trade strategies and educational programs. This charting style opened my eyes to a more robust understanding of the auction process and how to interpret price action like a detective.

Be Terse with Technicals

Prior to that class I had researched and used many of the most popular technical tools and indicators. Most beginning technicians start with bar charts and moving averages. There are seemingly endless byproducts derived from just those two devices. Once computers were small enough to bring on the trading floor, the list of indicators grew exponentially. Traders began to experiment in search of the holy grail of price predictors.

Candlesticks became more popular than bar charts. Initially stochastics and RSIs were the most popular indicators used to determine if a market was overbought or oversold. Simple moving averages were often replaced by exponential MAs. MACD (moving average convergence divergence) and Bollinger bans were derived from tracking average prices. These can be used to express when a market is ripe to trend or due for a consolidation phase. ADX is another popular indicator that is meant to reveal the strength of trend. The list of technical tools is vast and seems to grow every year.

As an educator I have seen many traders’ screens, and some are so packed with indicators it is difficult to distinguish between the signals one should act on or ignore. These traders had cluttered their screens with so many signals that conflicts often arose. Thus, they froze and could not pull the trigger on a trade because one signal favored selling while and another was bullish.

Avoid Clutter for Clarity

The point of all this is to help you design your charts to give the answers all traders seek on a relatively clean slate. The list of indicators should include three types:

One, use an indicator that reveals when a trend is likely to commence. This gauge should illustrate when a market has spent too much time around a moving average, thus making it ripe to go vertical.
Two, find an indicator that reveals when a change in trend is likely. This gauge is used to signal when a market has gone too far, too fast, or on other words is overbought/oversold. It is often used to identify when to take profit.
The third must have gauge is one the allows you to stay with a trade and ride the trend until exhaustion.

Final Thoughts

Markets move and coil or trend and consolidate. Quick decisions can make or break a trader. It is easier to execute strategy if your mind and screens are not cluttered with conflict. Keep it simple for clarity.

John Seguin
Senior Technical Analyst
Market Mentor Mentoring