P1:a/b P2:c/d QC:e/f T1:g
c06 JWBK195-Saettele June 5, 2008 19:35 Printer: Yet to come
These indicators work because markets do trend and markets do reverse
at optimistic and pessimistic extremes.
One problem that traders, especially new traders, face is that there are so
many indicators to use. Which ones should you use? Many free charting
packages include at least a dozen or more indicators, and paid packages
include many more. The charting package that I use provides hundreds
of already programmed technical indicators. Traditionally, indicators are
classified as either trending or range. Moving averages are often consid-
ered to work better in trending markets and oscillators such as RSI, and
stochastics are considered to work better in range bound markets. Techni-
cal indicators are just a piece of the puzzle, along with sentiment indicators
(see Chapter 5) and price patterns.
Using these tools together will improve your odds for success. Finally,
there is no correct answer to the question, “What indicators should I use?”
Trading is very personal, and you should use what you feel most comfort-
able with. I will show you how I use the indicators that I use, which hope-
fully will inspire your ideas.
A study of price data, technical analysis can be classified as a statistical
study. Any statistician will tell you that the results become more reliable
as more data is included in the study. In our case, the result is future price
action (more specifically, a trading signal) and the data is past price action.
An hourly chart will yield more reliable signals than a minute chart since
the hourly chart includes much more data than a minute chart. Similarly,
a daily chart will yield more reliable signals than an hourly chart, and a
monthly chart will be more reliable than a daily, and so on. With this in
mind, I find extremely short-term charts, which I consider anything under
hourly bars, to be unfavorable.
Also, short-term trading increases the risk of making emotionally
based decisions. For example, a swing trader risking 100 pips on a 1 lot
trade is risking the same amount as a scalp trader risking 10 pips on 10
lots. Aside from the fact that the scalper’s margin for error is far less, the
scalper sees his P/L fluctuate in larger amounts. The opportunity to make
or lose more in a shorter amount of time amplifies the greed and fear factor
which in turn increases the likelihood of making a stupid trading decision.

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