Notes on the Correct Use of Technical Indicators
Trend Indicators: Moving Averages, Ichimoku Cloud, Bollinger Bands, Keltner Channels.
Oscillator Indicators: MACD, RSI, Stochastic, DMI, Fisher Transform.
All these instruments were created to recognize points of equilibrium and disequilibrium (inflection points) in the market. Essentially, they are tools designed to detect the optimal times to buy or sell. The profession of trading can be summarized as follows: people creating theories, tools, indicators, and systems to know when to buy and sell based on the historical record of price.
Keys to Using Technical Indicators
1-Indicators Do Not Predict the Future
Indicators alone lack predictive capability; they are just mathematical formulas based on historical data. However, their correct or incorrect use can significantly impact your success rate.
2-The Importance of Harmony with Price Structure
If your tools or indicators do not show a clear and harmonious pattern aligned with the price structure, you are probably making decisions based on randomness. Avoid erratic movements.
3-Using Trend Indicators Correctly
These indicators detect trends and points of continuity. Your success rate will increase if you avoid looking for trend reversals with them, unless there is a structural or historical pattern in a higher timeframe that justifies such a reversal.
4-Resolving Contradictory Readings
If an indicator shows contradictory readings across various timeframes, give more weight to those harmoniously aligned with the historical price structure.
5-Risk-Reward Ratio
When price fluctuations aligned with your indicators show a risk-reward ratio of at least 1:2, the probability of success in your trades increases, attracting more participants.
6-Conflicting Signals
When trend indicators and oscillators in the same timeframe send contradictory signals, the market is uncertain. Consider moving to a higher timeframe for clarity or avoid entering at that timeframe.
7-Indicator Confluences
Confluences of indicators of the same type in one timeframe do not add value since the signals will be very similar. Aligning multiple indicators does not necessarily improve your success rate.
8-Reversal Signals in Oscillators
Divergences in oscillators show weakness in price action but do not justify a trend reversal unless there is an aligned historical structure or pattern.
9-20-day Moving Average
It is the most used indicator by investors due to its accuracy in revealing trend strength and equilibrium points. It's fundamental in indicators like Bollinger Bands, Donchian Channels, and Keltner Channels.
10-Price Action vs. Technical Indicators
You can make good decisions based solely on price action, but not solely on technical indicators.
Practical Examples:
•MACD: The more erratic, the more randomness. In a trend, if it accompanies continuations harmonically, its predictive capability increases, identifying reliable inflection points.
•Ichimoku Cloud: Useless in range-bound markets; its function is to show strong trends and equilibrium zones.
•EMA 20: If the price reacts strongly when touching it in a trend, it is likely that many market participants are watching it, making it an opportunity zone.
•Crosses of Moving Averages and MACD: If the 20-day and 50-day moving averages cross above a declining price while the MACD crosses upwards, it indicates a contradictory signal of market doubt.
Conclusions:
No single indicator is superior by itself; all have strengths and weaknesses. The key lies in how, where, and when to interpret their signals. Avoiding randomness by relying on structure and historical records improves your success rate.
Remember to study more about mass psychology than psychotrading, do not buy courses (especially scalping courses), respect the ancients, and above all, question everything except your own capabilities.
Oscillator Indicators: MACD, RSI, Stochastic, DMI, Fisher Transform.
All these instruments were created to recognize points of equilibrium and disequilibrium (inflection points) in the market. Essentially, they are tools designed to detect the optimal times to buy or sell. The profession of trading can be summarized as follows: people creating theories, tools, indicators, and systems to know when to buy and sell based on the historical record of price.
Keys to Using Technical Indicators
1-Indicators Do Not Predict the Future
Indicators alone lack predictive capability; they are just mathematical formulas based on historical data. However, their correct or incorrect use can significantly impact your success rate.
2-The Importance of Harmony with Price Structure
If your tools or indicators do not show a clear and harmonious pattern aligned with the price structure, you are probably making decisions based on randomness. Avoid erratic movements.
3-Using Trend Indicators Correctly
These indicators detect trends and points of continuity. Your success rate will increase if you avoid looking for trend reversals with them, unless there is a structural or historical pattern in a higher timeframe that justifies such a reversal.
4-Resolving Contradictory Readings
If an indicator shows contradictory readings across various timeframes, give more weight to those harmoniously aligned with the historical price structure.
5-Risk-Reward Ratio
When price fluctuations aligned with your indicators show a risk-reward ratio of at least 1:2, the probability of success in your trades increases, attracting more participants.
6-Conflicting Signals
When trend indicators and oscillators in the same timeframe send contradictory signals, the market is uncertain. Consider moving to a higher timeframe for clarity or avoid entering at that timeframe.
7-Indicator Confluences
Confluences of indicators of the same type in one timeframe do not add value since the signals will be very similar. Aligning multiple indicators does not necessarily improve your success rate.
8-Reversal Signals in Oscillators
Divergences in oscillators show weakness in price action but do not justify a trend reversal unless there is an aligned historical structure or pattern.
9-20-day Moving Average
It is the most used indicator by investors due to its accuracy in revealing trend strength and equilibrium points. It's fundamental in indicators like Bollinger Bands, Donchian Channels, and Keltner Channels.
10-Price Action vs. Technical Indicators
You can make good decisions based solely on price action, but not solely on technical indicators.
Practical Examples:
•MACD: The more erratic, the more randomness. In a trend, if it accompanies continuations harmonically, its predictive capability increases, identifying reliable inflection points.
•Ichimoku Cloud: Useless in range-bound markets; its function is to show strong trends and equilibrium zones.
•EMA 20: If the price reacts strongly when touching it in a trend, it is likely that many market participants are watching it, making it an opportunity zone.
•Crosses of Moving Averages and MACD: If the 20-day and 50-day moving averages cross above a declining price while the MACD crosses upwards, it indicates a contradictory signal of market doubt.
Conclusions:
No single indicator is superior by itself; all have strengths and weaknesses. The key lies in how, where, and when to interpret their signals. Avoiding randomness by relying on structure and historical records improves your success rate.
Remember to study more about mass psychology than psychotrading, do not buy courses (especially scalping courses), respect the ancients, and above all, question everything except your own capabilities.
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