Stocks & Commodities V. 31:13 (15-22): Balancing Your Indicators by Martha Stokes, CMT

Stocks & Commodities V. 31:13 (15-22): Balancing Your Indicators by Martha Stokes, CMT
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Balancing Your Indicators by Martha Stokes, CMT

The Technical Triad

With so many indicators to choose from, how do you select which ones to use? By looking at three primary data, you can select a few that will prove useful. Find out how.

It is not uncommon to find anywhere from 70 to 100-plus indicators built into a charting program. Itís nice to have a choice, but you are not going to use all of them on a regular basis. So how do you decide which ones to use? It is important to remember the three primary data in a chart: price, time, and quantity (volume). All indicators make up at least two of these data items, either price and time, or quantity and time. A few include all three data. Using all three data creates a hybridized leading indicator that can outperform the other kinds of indicators for short-term trading styles.

The long lists of indicators now available to retail traders can often cause confusion, frustration, and serious trading problems. The most common problem with these long lists is that it lures the traders into performing incomplete analysis without them realizing that what they are doing is out of balance.

The main reason behind this is that the preponderance of indicators available to traders is price and time indicators. About 75% to 80% of the indicators are price/time-based indicators versus a mere 20% to 25% quantity/time-based indicators. As a result, traders tend to choose too many price/time indicators and too few quantity/time indicators in their trading platform. This leads to too much price analysis and too little quantity analysis.

For retail trading systems, emphasis has been placed on price/time indicators for a variety of reasons. Most of the overly popular indicators were written decades ago for a very different market from what we have today. Those indicators were the first to be ported into the charting systems back in the 1990s, when retail trading started to gain popularity.

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