Yesterday, I mentioned that I would begin focusing more on trading strategy and education while still maintaining the same level of trading ideas, stocks screens, trading plans, etc. Today, I want to talk about indicators and their use towards being a successful trader.
The fact is, that indicators do serve a good purpose, but they cannot be used as the main reason to buy or sell a stock. Instead, you should use them secondarily to price and volume. Over the course of the next five or so trading days, I will discuss in more detail, they ways in which indicators are misused, and how you should be careful not to make the same types of mistakes as well.
Indicators, if abused, can ruin a trader’s portfolio, and there is common thread among traders who do this, and they can be summarized below in five concise points, of which I will be expanding on each of them in separate posts this week and next.
5 Ways To Abuse An Indicator.
1. As already stated, traders use them as a primary reason for buying or selling a stock, rather than to support their analysis on price and volume
2. Traders will employ the use of too many indicators, thinking they are covering their bases and minimizing their risk exposure; but instead they only create more confusion among themselves and creates the inability to come to a final decision on the trade in general.
3. Similar to the first one, traders will often look for the “Holy-Grail” – the end-all of all indicators, the infallible source to riches beyond the wildest of imaginations. Snap-out of it! It doesn’t exist, nor will it ever. It is as far fetched as the “Flux-Capacitor”.
4. Trader will read a description of an indicator and automatically begin using it, without fully understanding the variables that go into it.
5. Failure to back test the indicator to see if there is any statistical significance between it and the ability to profit from it.