What is the best technical indicator?
‘What is the best technical indicator?’ is a common question and the answer is, ‘ the one that works for you’ and i will explain why. But first i will say, if you see someone selling a system telling you it uses a magical indicator they have created, or someone is telling you a definitive way to use a technical indicator, be wary.
The best technical indicator is the one that works for you. I know many people that dont even use charts and instead react to what they see being traded in the time and sales combined with the depth of market order book. I include myself in this, most of what i do is based on order book patterns, but this is a huge topic and cant really be distilled into one post.
But back to the question about technical indicators, i know people that use them effectively, but they are no holy grail. There are no technical indicators from what i have seen that tell you information that you cant see from just looking at a plain bar chart. So i would advise you use no more than two indicators on a chart for those of you that struggle to form a clear opinion on the overall market tone.
Personally, if i were to use any indicators it would be a moving average, because it is clear visual filter to make sure you are trading with the trend. For example, it would be easy to set up a trading rule along the lines of “i will only get long a market that is trading above its 20 day moving average”. Its good to have such rules in your trading plan. But obviously it takes time and practice to realise if this has any edge. But the key is picking one indicator (for example 20 day moving average) and sticking to it. There is NO indicator that always gives profitable signals. You need to accept you will have trading losses, the key is to learn to recognise them early and get out of the trade. But jumping from one indicator to another is a fools game, Say you are using a 20 day MA as your filter and you have had 4 losing trades and you think to yourself “this indicator doesnt work, i am changing it to a 50 day moving average because looking at my chart it would have made money for the last two trades”. Well chances are the next trade you would have taken on the 20 period MA would be successful and the 50 period MA will stop working, because you are doing what every other moving average trader is doing. You are falling for the trap of trading with the majority. The majority of traders lose, you do not want to be doing the same thing as them.
Another technical study i would use is volume. Volume is what moves the market. It is a footprint that cannot be hidden, it takes time and practice looking at volume and how it can be used for an edge. But generally you want to be trading where the big money is moving theirs. So if a market is breaking through a big level and volume is increasing this is a sign the break is real. Where as a break on low volume is usually just looking to run stops and likely to retrace. Likewise if a level cannot break and it is absorbing a lot of volume it shows there is a big buyer or seller defending the level and the level is likely to hold. It is very subjective but the tools can be used to enhance your entries. It takes a lot of time, to master any aspect of trading so remember, no live trading until you can prove you are profitable for at least 6 weeks straight, or after 200 trades you are profitable. And stick with it!