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In today’s episode, you’ll discover the truth about trading indicators that nobody tells you.
You’ll discover how to use it like a pro even though it’s a lagging tool.
So tune in right now…
Hey, hey, what’s up my friend?
In today’s episode, I’ll share the truth about trading indicators.
They usually get a really bad rep.
You get stuff like:
“Rayner, indicators are lagging. You shouldn’t focus on indicators; price action is king!”
Here’s the thing…
The candlestick or price that you see on your chart is a lagging tool as well.
It occurs only after the fact. And the market has to close lower for the bar to be bearish.
In other words, everything that you see on your chart is lagging.
So forget about the noise where know traders say indicators are useless, it’s lagging. They usually say that because they don’t really know how to use indicators correctly.
In today’s episode, I want to share with you the true purpose of indicators, and how you can use them in your trading.
1. Indicators help you filter out market conditions
Indicators can help you filter out for market conditions.
For example, let’s say you only want to buy in an uptrend. How would you define an uptrend?
Most discretionary traders will use stuff like identifying higher highs and higher lows.
It’s not wrong, but there’s a subjective element to it and this is where indicators shine because there is no subjectivity to it.
If RSI is at 70, it means it’s at 70. If RSI is oversold at 30, it’s 30. There is no subjectivity to it.
One way to define the trend is to use the RSI indicator.
You can use a 250 period RSI (about 250 trading days in a year) and pay attention right to the 50 Mark of the RSI.
Anything above 50, the market is usually in a long-term uptrend. But if the market is below RSI 50, it’s likely to be in a long-term downtrend.
50 is like the equilibrium level because RSI basically measures average gains to losses. So if the RSI is at 50, it means that the average gains to average losses is at the same level.
But if every gain is larger than the average loss, that’s where your RSI goes above 50 and that’s where you get an uptrend.
So one way you can use to identify trending market condition is to use the 250-period RSI:
- If it’s above 50, it’s a long-term uptrend
- If it’s below 50, it’s a long-term downtrend
2. Indicators serve as an entry trigger
You can also use indicators to tell when to enter a trade.
One example is the Donchian channel. It by default helps you identify the 20-day highs and lows.
If you’re a trend follower wanting to trade the breakout of the 200-day highs. You can use the Donchian channel, set it to 200 days settings.
When the price breaks above the upper of the Donchian channel, it’s a signal that the price has broken out of the 200-day high. It’s an entry trigger that you can use to get long.
A simple tool like the Donchian channel can help you time your entries when trading breakouts.
This is very objective because we are dealing with, 200-day highs, 50-day high, etc.
So you can use indicator is as an entry trigger and to time your entries.
3. Indicators help you identify your exits
You can use indicators for exiting your trades.
Let’s say you are a trend follower and you want to ride the trend.
50-day moving average
You can use a tool like the 50-day moving average to ride the trend.
If you’re long, you’ll remain long until the price closes below the 50-day moving average.
This way, the 50-day moving average helps you trail your stop loss in the market. It can help you ride a medium-term trend in the market.
So you’re using the moving average to exit your trade.
4. Indicators help you identify area of value
Let’s say in a strong trend, it consists of higher highs and lows. But the pullbacks are relatively shallow because the trend is strong.
20-day moving average
So what you can do is to use an indicator like the 20-period moving average to help you identify an area of value.
This means that if the price pulls back towards the 20-period moving average in an uptrend, there’s a good chance that buying pressure could come in at around a 20-period moving average to push the price up higher.
So you can see that different indicators have different purposes. And before you think that it’s useless or lagging, you’ve to ask yourself:
“What’s the purpose of every indicator on my chart?”
And in today’s episode, I’ve shared with you four main purposes of an indicator:
- To filter for market conditions.
- To serve as an entry trigger.
- To help you manage your exits as a trailing stop loss
- To identify an area of value.
With that said, I’ve come to the end of today’s episode and I’ll talk to you soon.