Chapter 4

Gaining Critical Advantage from Indicators

IN THIS CHAPTER

Bullet Moving beyond emotion with indicators

Bullet Conquering fear of noise

Bullet Selecting indicators

Bullet Examining skill versus art

Indicators are a shorthand way to identify and measure market sentiment. They give you a platform for making rational trading decisions, bypassing greed, fear, and the other emotions that accompany trading. That’s the first advantage of using indicators — getting rid of emotion in trading.

Technical traders believe that systematic trading has a sporting chance of making significant profits. That’s the second advantage of indicators: They identify conditions based on data and by having realistic expectations about how well indicators work as forecasting tools, you’re led to having trading rules that offset indicator shortcomings.

And indicators have shortcomings! They don’t always work, and I explain why in this chapter. To overcome the unreliability of indicators, a money management plan is necessary, which I cover in Chapter 5.

Trading is about money, and money arouses emotion. The shorthand description ...

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