How do you choose your most reliable technical indicators?

1 Know your trading goals

Before you start looking for indicators, you need to define your trading goals and objectives. What kind of trader are you? Are you a scalper, a day trader, a swing trader, or a long-term investor? How much risk are you willing to take? How much time do you have to monitor the market? These factors will influence the type and number of indicators you use, as well as the time frame and market conditions you trade in. For example, if you are a scalper, you might prefer fast and responsive indicators that can capture short-term price fluctuations, while if you are a long-term investor, you might favor slow and smooth indicators that can filter out noise and show the overall trend direction.

2 Understand the indicator categories

Technical indicators can be broadly classified into four categories: trend, momentum, volatility, and volume. Trend indicators show the direction and strength of the market trend, such as moving averages, trend lines, or MACD. Momentum indicators measure the speed and force of price movements, such as RSI, Stochastic, or CCI. Volatility indicators show the range and variability of price fluctuations, such as Bollinger Bands, ATR, or Keltner Channels. Volume indicators show the amount and intensity of trading activity, such as OBV, Chaikin Money Flow, or On Balance Volume. Each category has its own advantages and limitations, and can provide different information and signals. You need to understand how each indicator works, what it measures, and what it implies, as well as how to interpret and use it correctly.

3 Choose indicators that complement each other

One of the common mistakes that traders make is to use too many indicators or indicators that are redundant or conflicting. This can lead to confusion, paralysis, or false signals. To avoid this, you need to choose indicators that complement each other and provide different perspectives and confirmation. For example, you can use a trend indicator to identify the trend direction and a momentum indicator to gauge the trend strength and potential reversals. Or you can use a volatility indicator to determine the optimal entry and exit points and a volume indicator to confirm the validity and conviction of the price movements. The key is to balance the number and diversity of indicators, and to avoid overloading or contradicting your charts.

4 Test and optimize your indicators

Once you have selected your indicators, you need to test and optimize them to see how they perform in different market scenarios and time frames. You can use historical data, backtesting, or demo accounts to evaluate the accuracy, reliability, and profitability of your indicators. You can also adjust the parameters, settings, and thresholds of your indicators to fine-tune them to your trading style and strategy. For example, you can change the length or type of moving averages, the periods or levels of RSI, or the standard deviations or bands of Bollinger Bands. However, you should avoid over-optimizing or curve-fitting your indicators, as this can reduce their robustness and adaptability to changing market conditions.

5 Review and update your indicators

Finally, you need to review and update your indicators regularly to ensure that they are still relevant and effective for your trading goals and objectives. Markets are dynamic and evolving, and so are your indicators. What worked well in the past may not work well in the present or future. You need to monitor the performance and signals of your indicators, and compare them with the actual price movements and outcomes. You also need to be aware of any changes or developments in the market environment, such as volatility, liquidity, trends, or cycles, that may affect the validity or reliability of your indicators. You should be ready to modify or replace your indicators if they become obsolete or inaccurate.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?