How traders use indicators:
Indicators help traders fulfil three basic functions:
How indicators should be used:
Regardless of what it is used for – alert, confirm or predict – a trader should never put all their faith in an indicator. When they do use one they should know it inside out. Take a holistic approach and use the most popular indicators in the market to gain the best picture possible.
We use lagging indicators to confirm a trend is really happening. Once the trend is established, the leading indicators are used to find overextended market conditions – potential turning points.
It is considered dangerous to trade a leading indicator signal against the prevailing trend of a market.
In an upward prevailing trend, it is best to look for buying setups via oversold signals from a leading indicator. In a downward prevailing trend it is the opposite, look for selling setups via overbought signals from a leading indicator.
Readings from indicators have different meanings in different circumstances. By using other analysis techniques, as well as indicators, we’re building up the evidence towards placing a trade.
- Indicators help traders perform three functions: alert, confirm or predict.
- Generally, lagging indicators should be used to confirm a trend.
- Then, oversold signals from leading indicators are used to buy into an uptrend and overbought signals to sell into a downtrend. This is trend following trading.
- Don’t put all your faith in an indicator or set of indicators, use it or them to analyse the market holistically.