Day Trading Indicators and Indicator Trading
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Day Trading Indicators and Indicator Trading
Introduction
Did you dive into day trading after picking up a book on technical analysis and downloading a free charting program online? Many aspiring traders start this way, attracted by the promise of trading indicators that claim to predict price movements. Surprisingly, these so-called 'best' indicators often come preloaded in free charting software, setting the stage for a new trading adventure.
Starting Out as an Indicator Trader
Equipped with a technical analysis book and a charting program featuring popular indicators, you’re eager to create a day trading plan. The book suggests various strategies, like using MACD for trend following or the stochastic indicator for picking market tops and bottoms. Perhaps you chose the stochastic, believing it would provide optimal trade entries. But if trading were that easy, we’d all be rich by now!
Initially, my journey was similar. After selling a business, I invested in trading, using MACD and a 20-period moving average to trade trends. My first trade was a win, but subsequent experiences taught me that success wasn't guaranteed.
Learning Progression in Day Trading
Starting as an indicator-only trader is common. Indicators are accessible and offer seemingly straightforward signals. Understanding the specifics of what each indicator does and familiarizing yourself with the arithmetic behind them can be a valuable learning step. Knowing the "what" rather than blindly following signals lays a stronger foundation for your trading education.
However, many traders hit a roadblock when they realize that slavishly following indicators is not profitable. You might search for better indicators online or purchase mechanical trading systems, only to face more frustration when they fall short. Signal services and chat rooms might seem helpful, but without proper understanding, profitability remains elusive.
The Importance of Trading Psychology
I, too, struggled with these issues, trying various combinations of indicators and purchasing multiple books. Ultimately, I sought mentorship from a skilled money manager. While I learned a lot, trading real money was daunting, especially without acknowledging the psychological challenges involved. Many beginner traders overlook the mental aspect of trading, considering it a weakness rather than a critical component of success.
Reevaluating and Adapting Strategies
Taking a break was pivotal for me. It allowed me to appreciate the difference between a trading setup and a trading signal. This insight led to a better use of indicators?"not as signals, but as tools within a trading method where discretion plays a role, as opposed to rigid mechanical systems.
Many traders focus solely on the right side of charts, neglecting the importance of the left side?"price, patterns, and market conditions that influence movement. Recognizing these elements helped transform my trading approach, allowing me to develop a more effective strategy.
My Learning Journey
- Feb 1995 - Jun 1996: Started with indicators only, dealing with real money and psychological struggles.
- Jun 1996 - Mar 1997: Embraced trading psychology, understood trading setups, and differentiated between setups and triggers.
- Mar 1997 - Nov 1997: Achieved profitability through paper trading, transitioning to real money trading.
From Indicator Trader to Method Trader
This narrative reflects not just my personal experiences but also those of others I've guided. Many initial struggles in day trading stem from an overreliance on indicators and attempts to turn them into mechanical systems. While not impossible, it wasn't sustainable for me. I advise new or struggling traders to consider these insights for a successful trading journey.
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