Chapter 4
Gaining Critical Advantage from Indicators
IN THIS CHAPTER
Moving beyond emotion with indicators
Conquering fear of noise
Selecting indicators
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.
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