If you are
new to trading, you have heard the term “indicator” and that they are vital
tools for traders. Well, maybe. Sometimes. In my opinion, there is a lot of
misunderstandings about indicators and far too much confidence in them.
That is way
I am now starting a little series of articles on indicators, both here on the
blog and on Medium. On Medium, I will do more of an introduction or overview of
them and here on the blog, I will go into more detail of how they can be used
and how I use them.
What is
important to know is that all indicators are derived from price data. Some
indicators allow use volume. But the thing is that you already have the price
data on the chart, all indicators do is to recalculate that data and present it
in another form.
Years ago,
I was told by a seasoned trader who didn’t use indicators at all, that you could
always look at price and estimate the indicator but not the other way around.
That is very true, you can. And with that argument, you would think that indicators
are useless. Well they can be, but they can also not be. Confused yet?
What I mean
is that price is what matters. Add volume to that and you have all you need to
trade. But indicators can be very useful to identify trends and potential turns
in price. Although you can use price data for this, indicators usually make it
much easier to see these things. They can make it easier to identify trends by
cutting out the “noise”.
This post
is just a teaser of the article series. Right now I am working on the first,
which will be about the Relative Strength Indicator (RSI). It is one of the
most commonly used and also one of the most misused indicators.
One thing I
would like to emphasize is that indicators just “indicate”. They should not be
used as buy and sell signal. I use them to scan for interesting stock and setups.
Buy and sell decisions are based on price and volume. Only and always!
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