Beginner question - indicators

Almost every system and method in the forum is about indicators. Is it necessary to use indicators to trade successfully with profits, or are there people also who learn and practice and succeed without indicators?

Is it a successful method, start a trade when moving average lines cross each other? Or when indicators derived from moving averages do something special?

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You do not have to use indicators. But you must have a strategy.

Moving averages are useful to help assess trend consistency and confirm trend direction but moving average crossovers are primitive and inefficient as entry/exit signals. They will work with a low return on capital in the very long run, but you’d probably do better by putting your money in a bank for 10years.

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This is the start of your trading journey

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You don’t necessarily need indicators to trade successfully. Many traders use price action (analyzing raw price movements) and support/resistance levels to make decisions without indicators.

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Look at posts about Price Action.

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No derivative of historical price can forecast future price discovery better than randomness.

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I feel totally depends on trader. Some of them use indicators like moving avg. for confirmation. What works best for you @AnnaProbably ?

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Thank you. It is exactly what I thought about, before I asked my question. I did not understand how something derived from history can predict the future of prices.

Thank you. You mean “for confirmation of price action”?

I don’t really know, I have very little experience! :confused:

This is a much bigger question than you probably, at this stage, realise! :slightly_smiling_face:

When we look at a chart we can only see where the price is now and where it has been in the past. But what we want to know is where the price is going in the future.

There are two different broad methods of trying to achieve this:

  1. Fundamental Analysis
    We are not so concerned here with historic price. We follow all the factors that influence price such as economic data releases, central bank policies, international geopolitics, etc. Then, based on how these change , we try to anticipate what impact they have on price, in which direction and by how much.

  2. Technical Analysis
    TA does not analyse fundamentals, it analyses price movement. Therefore historic price is important in extrapolating where price might go next. Basically, TA is analysing what the majority of other market participants are actually doing rather than what we personally think price should be doing.

For most retail traders, although fundamental analysis is relevant, if used alone it is too vague and long term in nature to be able to define accurately timing and levels for position entries and exits.

This should not be confused with “news trading” which is simply taking positions based on individual news events at the time of their release.

Technical Analysis takes a different approach to the same thing. It is looking also at price movement, but is more interested in analysing what the market is doing rather than why it is doing it!

Therefore mathematical based indicators such as moving averages can help to identify the presence and strength of underlying price movements and thereby highlight a trend (or lack of trend) and whether it is starting or ending, etc

With TA we are studying historic price and projecting forward where it is likely to go next. Hence the talk about the importance of “probability” in trading. We do not know where price will go next but we can judge what it is most likely to do - and, just as important, at what level do we decide that it didn’t do it afterall, and get out!

It is very similar to being in a maze with lots of alternative turnings along the way to the centre. And it is our task to judge which are dead ends and which are right. We often need to backtrack to find the right path again!

I would suggest most traders use a mix of both FA and TA in their analysis depending on their styles, choice of instruments, trading timespans, etc.

These are just some pointers and it is a long journey to decide which style mix and tools suit any individual trader - and, of course, these tend to change as we progress. Learning never ends…

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Thank you very much indeed, @SovoS , it’s a particularly helpful post and one I will return to, also.

I understand that moving averages (etc.) are helpful for identifying and defining trends. I understand also that some indicators derived from moving averages (etc.) may be helpful for identifying momentum.

From all I read, I am happy to use indicators for bias of direction and to inform me to “look for entry” or “don’t look for entry” but I wish to avoid using indicators to decide when to enter a trade.

The 5(!) things I now try to learn about are momentum, trend, volatility, volume and support/resistance. Not easy!!

And maybe not volume, if I trade forex, of course.

Personally, I think you are absolutely right here.

There is a good reason why indicators are called “indicators” - they only indicate what is worth considering.

If you use indicators or Price Action, or a mixture of both (which I recommend), then it means, by definition, that you are not trading an automated or totally mechanical system. In other words, you are a discretionary trader.

This is important to realise when using indicators. Why?

Because most indicators are based on some kind of mathematical formulas. This means that they function best when price movements match the parameters that are set in the indicator(s).

But prices do not constantly move in set patterns, speeds, volatilities, gradients, or distances. Therefore sometimes indicators work perfectly, sometimes sufficiently, and sometimes fail miserably!

So a discretionary trader has one major tool that has to be applied in the final analysis before making any decision - the brain!

And the brain functions on a combination of logic, commonsense, experience, and the application of a range of pyschological properties including patience and discipline.

I guess this is enough for one day! :grin:

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I wouldn’t say it’s mandatory to use indicators since many traders rely on price action and market structure, but they do help a lot. I like to use MA in the trending markets for confirmations. It is totally up to your trading style.

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It’s very helpful, and thank you very much.

This makes sense of what I read in two books about the futility of multiple different indicators all showing similar things in similar methods from similar calculations. I understand that if 1 or 2 indicators fail miserably then 7 or 8 extra indicators will also usually fail miserably.

[But I try also to look at 1 or 2 indicators not derived from moving averages. I now learned that there are several.]

Thank you for your helpful comments @SovoS !

Must’ve read the same books! :joy: :joy:

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You do not need the indicators themselves, you only need to understand the idea behind them and if it sounds useful for your strategy you can have that indicator involved in your strategy.

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