I was reading up on indicators and how they work when I met up with a friend recently and we lightly touched on the topic of trading.
In a passing mentioned, he said that different indicators work in different markets.
Some indicators work best in a trending market. But when the market ranges, these indicators become unstable. As such, a different indicators need to be applied to the ranging markets.
So I went home and pondered on this for a long time.
Anyone here can help?
How does one recognize that an indicator is good for trending and not ranging markets?
And how does one recognize that an indicator is good for ranging markets and not trending ones?
Even if I want to do a back test, what should I be looking out for when testing the different indicators to use for my system?
Most of the oscillators work only in ranging markets because, for example, if you use RSI, it will show overbought and oversold conditions very nicely when price moves in horizontal box. Once price starts trending up though, the RSI will depict price being in overbought condition for a long time.
MAs, Bollinger Bands, and ADX are good in determining trend and trend strength. They visually show you the direction of the trend (the exception is ADX, which is direction-agnostic), and the strength of the move.
My suggestion: The indicators are dandy to use as an “initial filter” if you watch more than 1 market, but don’t let it override prudent decisions based on the basic stuff: candlesticks, S/Rs, money management.
A no of people use a slower indicator for direction and a faster indicator for signal. example 20,10,10 Stoch for direction and 4,3,3 Stoch for signal. Let says the 20 Stoch pointing upwards but price bar come down to some S/R zone and 4,3,3 Stoch also come down and turn up. It is a trade setup. Hope this help
