As we went through candlesticks, chart patterns, and Fibonacci tools, it is time to write a few words about a very important topic.
When people start learning to trade, sooner or later they come across of word “indicator”.
Once they hear about indicators, they forgot everything they knew and start looking for the secret of trading.
They think the indicator is all they need in order to become successful.
The secret that will always keep them ahead from the others.
The number of indicators is countless and that’s why they keep looking for the right one for months even years.
In this time, they do not follow their rules, their only goal is to find that one.
If they are lucky, they will realize that using indicators is useless.
However, if they are not, they will keep searching for the secret one until they run out of money.
First thing’s first, let us introduce you to the term indicator.
What is an indicator?
An indicator is a certain software that gives you value based on a mathematical calculation from specific chart data that could be either the open price of a candlestick, close price of a candlestick or anything else.
In this definition, there is a clear reason why they are useless.
The indicators can be represented through lines, bars…
In other to get an indicator, you need to get data.
Once data is formed you can use it for calculation.
So, when we get the closing price of a candlestick, we will get the indicator value for that candlestick.
Because of that, the indicator is derived from chart data, in most cases closing prices.
In other words, they are just using another way of interpreting price action.
The value is represented like the line chart where the whole candlestick will be substituted with the dot.
Do you think one dot can describe price action better than a candlestick where you can see clearly the body, opening, highest, lowest and the closing price in that time frame?
They are good to give you general trend momentum same as line chart where you can see if the trend trending up, down or sideways but nothing more than that.
Using them for entry is unbelievable even to think about it.
Since they are displayed on the chart together with candlesticks, they make a total mess on the chart.
Just by using 3-4 indicators you can barely see candlesticks.
This is how your chart will be looking after you activate only 4 indicators.
We won’t mention their names since we don’t want you to even search about them.
We can only say that they are the most used indicators in trading and look at the mess they make.
Comparing to the chart above, do you see a difference when you look at the clean chart?
You can see every candlestick and you will never miss any sign you get from them.
While the majority is useless and show you price action way worse than candlesticks, we would like to point out two indicators which we find useful.
The indicators we use sometimes are the ones to check trend strength and to get some hidden sign from them.
Some people use them for entries, but we don’t find them useful for that.
The two indicators we use are the Relative Strength Index (RSI) and Moving Averages (MA).
Both of these two are giving you their “opinion” on the strength of the current trend in a specific way.
We like to use them to get confluence with other tools we use (trend lines, chart patterns, Fibonacci tools…).
The more signs you get from different charting tools, the more chances you get that you will be on the right side of the move.
That’s what we like to call the confluence of charting tools.
Important: The last thing which you want to do is to lose yourself in 5 different indicators!
You want your chart look like this
And this is how you don’t want your chart to look like
The most common mistake which almost every beginner do is that while they are learning how to trade and how to anlyze charts they think they need to try every indicator which exists in order to find out what suits them.
The truth is that some of indicators are very complicated and complex and you need few months sometimes even year or two to truly understand it and be able to use it properly.
Our advice is to learn what is support, resistance, trends lines, price action, candlestick analysis and maybe moving averages and Relative Strength Index and then stop with learning about new more complex indicators and start charting with this basic ones.
Once you master the basic in a year or two then you can start studying another indicators one by one and see if it makes sense to implement them to your trading plan and trading strategy.
Milos is an independent trader, with a background in journalism and publishing. Nomadic by nature, he’s lived in four different countries this decade. He’s fascinated by Blockchain technologies’ potential to reshape all aspects of our lives. Milos got into Bitcoin while completing his degree and hasn’t looked back since, writing about anything crypto-related. He is the co-founder of the Cryptoaims and he has a strong passion to educate people about this revolutionary technology.