The funny thing about being human is that we like being told what to do, thereby helping ourselves conserve mental energy. And the last time I heard we only use 5% of our brain in our lifetime.
Thus it is no surprise that indicators are popular among traders as it gives the illusion of easy trading and quick profits.
But is that really the case?
Let’s find out..
RSI indicator – Overbought & Oversold
In our daily lives we tend to buy value and sell dear e.g. Always looking for bargains in the supermarkets and countdown to Black Fridays.
We then bring this mindset to our trading endeavor by using the RSI indicator to highlight to us what is cheap or expensive.
How we do this is by using the RSI indicator to filter our trades. When price is overbought we do not long or if oversold we do not short.
How does that fare in trending markets?
Missed a 800 pips move on Eurusd because RSI Indicator said it’s oversold
Missed a 700 pips move on Usdjpy because RSI Indicator said it’s overbought
You can see that if you follow this indicator religiously, you are almost guaranteed to miss the best moves in the market.
There’s a saying that goes the market can remain irrational longer than you can remain solvent.
Basically what’s high can go higher and what’s low can go lower.
RSI indicator – Divergence
Another use of the RSI indicator is to spot divergence between price and RSI. When there is divergence, traders predict that a trend may reverse. But isn’t the trend your friend till it ends?
And how does that pan out?
Price takes out the swing high after a bearish divergence
Price takes out the swing low after bullish divergence
If you attempted to trade divergence here, I hope you had a stoploss placed.
3) RSI indicator – Ranging markets
Some will claim that RSI indicator works best in a ranging markets when price is overbought to short and oversold to long.
It is very tempting to add indicators to your chart as it adds color and life to it. I walked down that path before.
As traders we have only 1 goal, which is to make money.
If you were to use an indicator, know it’s purpose and verify it’s use. Splashing redundant indicators on your charts just because it looks good will not help your trading, but destroys it.
After years of trading I can tell you that 95% of all trading indicators out there simply don’t make the cut.
So, which indicators have you tried and abandon?