Technical Indicators: Cut Out the Clutter
A lot of people are intimidated by "technical analysis" because of all the jargon "technicians" throw around. Who wouldn't be scared by the following sentence: "The MACD is diverging while the RSI and Stochastic remain overbought, but the CCI and Momentum are both in an uptrend, however the ADX is falling." Huh? Here's the truth of the matter: the more you hear someone yack about the conditions of various technical indicators, the less likely it is that he knows what the hell is going on.
Lagging Price and Volume
Every piece of charting software comes with an abundance of technical indicators. My copy of Metastock Professional has nearly 100 built-in indicators! The fact is that all indicators are derivatives of either price or volume and as a result they will always lag the action itself. Your main task as a trader is to focus on the price and volume themselves; you do not want to clutter up your chart!
Ridiculous examples have been posted to the site.
A Crutch
Technical indicators can be your worst enemy because they will change how you think about the price action itself; they will make you rationalize bad positions. "Oh the RSI is overbought, it just can't go up any more, my short position is fine," or "the MACD is starting to turn up here, I think I'll move my stop loss down to give myself some more room." This kind of fudging is dangerous to your financial health, and if you watch price and volume alone, you won't be able to use the indicator's position as an excuse for being in a rotten trade.
K.I.S.S.
I put a 20 period exponential moving average on my chart, and I always mark the previous day's high, low, and midpoint. That's it. No OBV, no Accumulation/Distribution, no Bollinger Bands. No Aroon, no DeMark Sequential, no Gann Fans (fans of Gann are booing, I know).
What I do watch is each and every five minute candle as it forms and am constantly on watch for specific candlestick patterns like hammers, dark clouds, and shooting stars (more jargon I know, but this stuff is worth knowing). Having an understanding of common candlestick patterns is a huge advantage and I recommend Steve Nison's books to everyone who is serious about learning about them.
Nison's books may be found at amazon.com and
amazon.com
The cleaner your chart is, the clearer your decision making will be. Keeping an eye on your stock without cluttering your mind with contradictory and misleading junk (technical indicators) is one of the most important things you can do to become a better trader.
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