Friday, May 15, 2009

Why indicators aren’t the “key” to successful trading


(click to enlarge)

Which chart (#1 or #2) is giving you more information? They are both of the Dow Jones Industrial Average and they are both over the same period of time.

That’s right, both of them show the exact same thing! Some people like to think that if they find the right combo of indicators, or a “magic” indicator they will make lots of money. I fell into the same trap thinking if I could just get the correct combo of indicators my problems would be solved, and I’d be swimming in money. It wasn’t until about 1 to 1 and a half years into my trading carrier that I realized all indicators do is show you what is going on in the chart already. This is because they are just mathematical formulas of current/past price (and sometimes volume also) with some formulas trying to predict future movement based off current/past price. Now don’t get me wrong, some people do make money using indicators. However, even they will tell you that an indicator is not the “key” to successful trading. It is how the person reads the indicator that makes them successful, not the indicator itself.

Just to clarify, I’m not saying throw indicators out the window. What I’m saying is look at the indicator as a tool to help you read a chart, not as a magical money maker like I used to. You wouldn’t look at a hammer and think that it would design, and build a house for you. The hammer is just a tool to help you build the house, just like an indicator is a tool to help you make good trades.

2 comments:

ORION MACHINE said...

good post man, how you been up there? :)

StockHunter said...

Thanks!

I've been good, and this weekend I'm going on the 1st backpacking trip of the 2009 year :D. Summer has finally come, now it's just a matter of waiting for the snow/ice to melt off up at treeline :).

As far as trading goes the past 2 weeks have been hard, but I figured out what I was doing wrong, corrected it, and so far today (5-18-09) my results are good.