Why do Too Many Forex Trading Indicators could get you Broke?
Today we are going to talk about mistakes. Yes, simply what not to do. I’m actually kind of sick of all the trading advice you get all over the internet; stuff like ”cut your losses short and let the winners run…”. Really? When should I exit a bad trade and how much should I let a winner run? Nobody gives exact advice but it sounds cool to talk riddles and in case the trade goes south, they say “You should have done this or that”. So here’s one of the first article in a series focused on a real trader’s mistakes.
How you can go Broke from Using Too Many Indicators?
I don’t like talking about something I didn’t experience on my own so you can be sure that everything you will read here is a mistake I made at a certain point and it probably cost me money so… learn from the mistakes of others if they already paid the price. Today’s mistake: the cluttered chart.
It all begins with a strategy or indicator found on a forum somewhere. The pictures look great, the other users are praising the strategy for its amazing signals and huge amounts of pips made. So you decide to take a look at your charts and spot a few good entries so you move to the next step which is to back test it to make sure it’s really profitable. But that’s when things start to go sour: you realize the strategy is not so good after all… not really the Holy Grail you thought it was… ah, but you still think it’s good… the only problem is that it’s missing something… yes, a few more indicators, filters to keep you out of bad trades. What can a trader do, eh? There’s only one answer: add more indicators. But which one? No problem, you open your trusty folder of indicators and start trying out different ones… yea, this one would have kept me out of a bad trade. Ok, I’m going keep using it. Let’s back test again: now the strategy gives better results… but still you have losses and since you are on a frantic search for the Holy Grail, you don’t want any of those so you decide to add another “filter”…. And another… and another, until you realize Christmas came early this year… or so it seems because your chart starts to resemble a Christmas tree. Where are the candlesticks? Somewhere in the back, covered almost completely by a Semafor on top of a Zig-Zag, 5 Moving Averages and a Bollinger Band while the lower part of the screen is covered by Oscillators, Histograms and all sort of Red/Blue indicators [Check ForexFactory Forum for more details]. The problem now is that you don’t really know what to look for, what your conditions for valid entries are. Some indicators say “Short” while others say “Long” and by the time they all agree, price moved 50 pips and it’s too late to enter. What’s worse, you realize you started with a potentially good strategy and modified it almost completely, turning it into… the one in the link below. Bad idea if you ask me.
Conclusion - Less Is More!
You might be thinking that I am the one talking in riddles, but let me explain why “less is more”. As I said in the opening of this article, everything I talk about comes from my experience and I fell many times in the fallacy of a cluttered chart. I had a strong belief that each indicator on my chart serves an essential purpose and that I cannot trade without all of them. But wrong I was… because once you decide to get rid of some indicators, your mind will be more active, you will not seek guidance anymore from a Red/Blue histogram, but you will start to analyze price movement from a different perspective. You will start looking for clues which were present when all your indicators were on the chart, but you didn’t notice them. Think about it: blind persons still find their way because they learn to “look” at things differently. So why can’t we? Here are a few tips on how to do it:
- Stop attributing more importance than necessary to indicators. They are all derived from price!
- Limit your use of indicators to 2 or 3 max
- If you don’t want to delete them off the chart, at least drag their window down until you cannot see them anymore. Soon you will realize you don’t really need them but until that happens, you can still look at them by dragging the window up.
- Do not try to filter out all losing trades with the use of indicators. You’ll end up filtering out the good trades as well.
- Don’t just add a new indicator after a loss because losses will occur even if you use 100 indicators.
- Let indicators confirm your trade bias and don’t follow them blindly