By Richard K.
Introduction to Trading With Indicators Only
Trading with indicators offer an objective and statistical way of performing technical analysis that allow traders to take a closer look at price action and the underlying effects that are generally not perceivable with the naked eye. Depending on the intended outcome of an indicator’s main function, technical analysts rely on them when making trading decisions.
There exists hundreds if not thousands of trading indicators today and they serve an important part in any technical analyst’s tool set. Although there are so many of them they generally fit into one of four categories depending on what they were designed to do.
Technical indicators categories:
- Trend Indicators
- Momentum Indicators
- Volume Indicators
- Volatility indicators
When used correctly indicator trading can provide traders with a competitive edge, yet the mistake most beginner traders make is that they believe the more indicators they have the better they are going to trade and the more profitable they are going to be. This is a big misconception because having too many indicators on a chart often over complicate things which can lead to confusion.
Another issue that beginner traders face is that they use too many indicators from the same category rather than utilizing one indicator from each category so that they do not work against each other.
The biggest problem with indicators are that they are lagging in nature, meaning that they often tell you a particular outcome after the fact which could cause indecision when deciding on entering trades in the heat of the moment.
One way to overcome the lagging nature of indicators is to combine them with other tools that are leading in nature and that are good at identifying future price movement. Once you know how to use them in combination with such tools, indicators become more useful when used as a confirmation tool.
Technical Indicators vs. Market Geometry
Technical indicators when used on their own
One indicator that is used a lot is the Relative Strength Index (RSI) which falls under the momentum indicator category. The RSI is traditionally used to indicate overbought and oversold conditions in trending market environments and in the uptrend example above it becomes clear that there were extended periods where prices remained overbought making it almost impossible to call an end to that trend.
On the second chart above I added a Moving Average Convergence Divergence indicator (MACD) but only plotted the histogram (blue bars) of the indicator. This indicator also falls within the momentum category and is a great tool to spot momentum divergence.
Momentum divergence is when price moves opposite from what momentum is doing like the case on the far left where price moved upwards but momentum was decreasing, signaling a possible change in trend or a correction.
The momentum divergence on the far left did manage to signal a correction in price but if you look at the second time divergence popped up, in the middle of the chart, momentum kept diverting from the rise in price for a long period of time with no decent corrections to take note of.
Momentum also never diverted from price at the high on the right of the chart which in this example would have had a lagging effect, rendering the MACD useless at signaling that major change in trend.
Market geometry is based on the idea that future price structure in any particular market forms in a measurable geometric fashion which is often the result of previous market structure. Market geometry is therefore dynamic in nature and in our example above we can see one such market geometry tool named the Andrews Pitchfork in action.
When applying a pitchfork onto important swings that defined previous market structure, lines (called median lines) are projected at an angle into the future and when done correctly they map out the likely path that future price action will follow.
In our example above, on the same chart I used before, it becomes evident how well price moved within the boundaries of that pitchfork before it finally reversed after reaching the upper blue median line a second time around.
In the examples I showed above it becomes clear as daylight that the pitchfork worked the best at signaling market direction and where a trend is most likely to end but indicators do have their valuable space in trading especially when used as a confirmation tool together with market geometry.
Combining Market Geometry With Indicator Trading
Traders often over rely on indicators alone when making important trading decisions and forget the importance of understanding how and why price moves in the first place. When you understand price action and have methods to define price action in ways that are leading or predictive in nature then you will be a step ahead of the rest when it comes to analyzing markets.
Knowing what to expect from market movements and employing a strategy to take advantage of your expectations, when they are proven correct, is a powerful advantage to have. The remaining part of this article will give you a quick glimpse of a powerful strategy and how technical indicators can play an important part or function when combined with market geometry.
The Exponential Profits System (EPS)
After years of development and fine tuning I have developed a strategy that aims to execute one specific goal:
Finding the end of corrections within a trend and entering positions once the trend resumes again.
That goal might sound simple but to successfully pull it off requires a strategy that can be broken down into manageable steps that involve methods such as market geometry and rules based trading where indicators become particularly useful.
What follows will be a few examples of trade setups that were taken with minimal risk that resulted in massive profit, all by following a strategy that can be learned and applied successfully by anyone that is willing to put in the time and effort.
Recent EPS Trades
I have been tracking a correcting in the USD/CAD pair since the 13th February 2018 and identified a trading zone from where I expected that correction to end. Keep in mind that I analyzed and planned this trade ahead of time. After years of experience I have found that pitchforks work great at pinpointing areas where corrections are likely to end.
Following a set of rules based entry conditions I entered a trade at the exact low of that correction and made my final target 17 days later.
This is where my indicator played such a crucial role in helping me enter that trade. You will probably recognize the MACD histogram on the chart above and I used it to confirm momentum divergence when price reached an area of market geometry on a 5 minute time frame. It therefore forms part of one of my entry condition that I need to see before I take any trades and it has saved me a lot of times from taking bad setups that have a low expectancy of working out.
Towards the end of January 2018 I had my eye on Crude Oil and identified two possible zones where I expected a reversal from. In this case price moved through my upper price zone without my rules based entry conditions signaling me to take a trade. I only got a trading signal at my lower price zone.
Entering a position within my lower entry zone allowed me to take partial profit of 176 ticks while only risking 15 ticks. In this case price never reached my final target but I got stopped out on my trailing stop with additional profit.
Another great trade was helped along with yet another case of momentum divergence right at the area of market geometry I identified ahead of time.
Here’s another example of a trade forecast done on AUD/USD around the 21st December 2017.
Again the EPS strategy managed to find the exact low of that correction before it shot up and reached my target.
The exact low of that correction yet again had momentum divergence present allowing me to execute another profitable trade.
Trading successfully requires a solid foundation built on education, paired with a proven strategy that does not only rely on one component, such as an indicator/s to make it work. Technical indicators do however have their place in trading especially when they are used as a confirmation tool.
The examples I have shown you proves that the use of an indicator has a vital part to play in my overall strategy when it comes to signalling the right conditions for me to trade in and I do not take its importance lightly.
If you ever wondered what it takes to escalate your trading to new levels then be sure to check out my course here.
I hope you enjoyed what I have shown you today and that you will consider using additional tools such as market geometry rather than trading with indicators only.
Until next time
All the best