Avoiding Indicator Overload
Indicators play an important and ever increasing role in the trading methodologies of most traders,
What part do they play in a trader’s success?
Many traders place unrealistic expectations on their indicators practically expecting that the trades will be taken for them. Certainly every trader is seeking the edge and almost all day traders use some collection of indicators to help them find that edge.
While using indicators is one important element of successful trading, the overuse of indicators can just as certainly lead to the demise of many traders.
The classic newbie mistake is to load up the chart with every indicator available from the charting system and then proceed to locate some type of magical correlation in the markets price movement. What results is nothing but information overload. Redundant and overlapping indicators that serve to do nothing more than confuse.
The second and often most costly error is continuing to rely on a set of indicators that have never demonstrated their usefulness or ability to earn the trader any consistent profits. These traders are seeking a security blanket in order to avoid having to make their own informed decisions.
Do traders honestly think that looking at the same pre-packaged indicator as thousands of other traders is providing the ‘edge’ in your trading? Does it not seem inconsistent to be looking for an edge with this approach?
A MACD, stochastic, RSI, CCI, Moving Average etc… are all encumbered by the same limiting factors, that is that they all derive their output from the same data input. In other words they are all telling you the same thing about the market, but represented in slightly different ways.
Of course traders must keep an eye on what every other trader is watching, after all our charts are nothing more and nothing less than mass psychology graphically represented by volume, price levels and time frames.
How then can the average trader find the so called edge and do away with the multitude of overlaid and redundant often useless indicators?
The answer is Market Profile. While every other indicator is limited to a specific look back period (example the standard 14 period RSI), the Market Profile indicator evaluates an entire day worth of price levels, support and resistance.
Consider this, if a price level of 1160 was a critical area of resistance that you were looking to sell, would it matter if that price traded at 9:40 am or 2:45 pm? This is where the conventional look back indicators fail miserably. Using default settings we are only provided the resulting information for the last N bars (14 in our example of the RSI). Market Profile by contrast will keep a running ‘tally’ or evaluation of the 1160 price level for the entire day.
The market is an emotional being with a strong memory, institutions do not enter trades because the RSI is overbought or oversold over 14 periods, they enter because of acceptance or rejection of price levels, price levels that are clearly identified using the Market Profile.
At the core of understand market structure is Market Profile. Other conventional indicators certainly have their place in trading and keeping them ‘in their place’ will save traders many losses and much hardship.
Category: Market Commentary, Trading Articles
