Technical Indicators: Are they certain or probabilistic?There are three types of technical indicators that I have listed in this post- Trend, Momentum and Volatility . This is not an exhaustive but selective list of indicators. The selection is based upon the most useful and the most popular ones.
🔊 General Definitions
✔ Trend Indicators : They represent the overall direction of the market. These indicators lose their significance in a sideways market.
✔ Momentum Indicators : They represent the rate of change in price over a period of time. These indicators oscillate between a defined upper and lower limit and hence are also known as oscillators.
✔ Volatility Indicators : They represent the intensity of price swings around the mean price. These indicators are useful in identifying vital values such as stop loss and targets.
👉 Select carefully : Any indicator can be selected from a specific group but it should be avoided to select two indicators from same group. Reason being two indicators would fire signals for the same characteristic and hence one of the signals will become redundant.
For using multiple indicators, it is advised to take only one signal from each group.
👉 Certainty behind indicators : Trading is probabilistic and indicators are a subset of trading, hence they cannot be certain. In simple words, indicators are derivatives of the price action so most of them are delayed. That is the reason, many a times, signals are fired too late. On the other hand indicators are good at devising strategies.
🚩It is advised to trade one strategy consistently. One advantage of indicator based strategies is that they make the trading process more mechanical and hence help in infusing discipline. In this way it may suppress the haunting psychological weaknesses in traders over a period of time.
🚩There are some traders who have used indicators and made money while most of the others have given up on indicators and made money by trading price action only. In my opinion one should always give it a try before giving up. It will surely add to one’s knowledge. I am not too much in favor of indicators but one should always try to discover new things for creativity.
I hope it helped. Thanks for reading 👋
