Trading Indicators are used by most traders to make money trading.
They are chart analysis tools used to show what happened on the price and consequently help in making trading decisions.
These indicators have also had many traders lose money while trading using them.
But are the trading indicators really the problem?
The fact that many other traders have used them to make money means that the indicators themselves are not the problem.
The trader is the problem.
So, these traders who lose money with trading indicators, what exactly is their problem? What do they do wrong?
Here is our ultimate list of Reasons why most traders lose money with trading indicators and what you should do differently.
Having No Idea of what they are doing.
Are you shocked that traders can actually have no idea of what they are doing?
Some traders just log into their trading accounts, pick trading indicators, and apply them on the chart.
They then proceed following the indicator wherever it leads, with completely not even the slightest idea of how the indicator works or what they are doing trading with the indicator.
If you are such a trader, looking for a way to blow your trading account quickly, look no further. This is the quickest way so far.
Otherwise, you need to understand what you are doing with an indicator in order to make the best out of it.
Not Understanding Indicators.
Having no understanding of what indicators are and what they do is a major reason many traders lose money.
Trading indicators are lagging, to mean that they show you what has already happened and do not predict the future.
Different indicators have unique and specific ways in which they help predict the market direction as well.
After understanding that all trading indicators are lagging, then you won’t have a problem using them.
This is because you’ll already know that what an indicator says is not what’s currently happening.
Better still, you will find your trading journey enjoyable if you understand how each trading indicator is used.
How MACD is used is different from how the Parabolic SAR, RSI, SMA, ATR, Momentum, ADX, and Alligator among others, are used.
Using One Indicator.
When a trader uses only one indicator and trusts it completely to generate trading signals, then they are bound to lose money.
Using only one indicator is never an accurate way to predict the markets.
Indicators work best when combined correctly.
In that case, when most accurately combined trading indicators all point towards one direction, the price will most likely move towards that direction.
Avoid using one indicator and find other possible trading indicators you can combine with it for the best results.
Using one recipe is another ingredient to blowing your account fast.
Combining Indicators Wrongly.
While emphasizing on combining trading indicators, I must say that the combination must be done correctly.
Using trading Indicators of the same class yields redundancy.
For the best results, traders must combine trading indicators of different classes.
That way, when such indicators on various indicator classes point in one direction, the price will most likely move in that direction.
The different classes of trading indicators are trend, volume, volatility and momentum indicators.
Pick a trading indicator from each class.
Make no mistake of applying more than one indicator from the same class.
Trend Indicator Examples:
- Moving Averages.
- Parabolic SAR.
- Bollinger Bands.
- Ichimoku cloud.
- Zigzag indicator.
- Average Directional Index.
- Alligator and many more.
Volume indicator examples:
- Chaikin Money Flow.
- Money Flow Index.
- Volume RSI.
- Volume price trend indicator.
Volatility Indicator Examples:
- Bollinger bands.
- Average True Range.
- Relative Volatility Index.
Momentum indicator Examples:
- Relative Strength Index.
- Bears power.
- Bulls power.
- Rate of Change.
- Detrended Price Oscillator.
Using Indicators as Strategies.
A trading indicator is by no means a trading strategy.
What trading indicators do is actually form the basis of formulating a trading strategy.
You cannot pick one trading indicator, or two, and make them your trading strategy.
You must understand that indicators are lagging and can only help in showing past data but not in making trading decisions.
A trading strategy can, however, be used to make trading decisions and that is where most traders go wrong.
To formulate a trading strategy, one needs to combine various trading indicators from the various classes.
After that, they must define their entry and exit as well as money management for it to be called a trading strategy.
What that means is that an indicator is far away from becoming a strategy.
Using Indicators as the Holy Grail.
This one is funny.
Yes, you know how each trading indicator works. You have even combined different technical indicators from different classes.
Does that mean you will obey that indicator 100% as you expect 100% effectiveness?
Everything boils down to the fact that trading indicators are lagging and can only show what has already happened.
They can only help in showing the past data but not predict what will happen in the future.
If one expects trading indicators to show you exactly where the price will go next without fail, then you will lose money.
Have a margin of error in which you assign your trading indicators because they are not the Holy Grail. Nobody has found a foolproof indicator or strategy yet.
Blindly Copying Indicator Settings from Other Traders.
It’s about to get interesting.
A trader who knows which indicator settings work for which market posted their indicator settings.
Without questioning anything, another copies the exact settings on their chart and expects the same good returns.
What you need to understand is that such trader you copied from understands which market conditions suit the indicator settings they showed you.
Now because you don’t, you will copy them and still blow your account.
It has happened to many traders who have lost money.
Understand which market conditions to apply every indicator setting. That way, you can be assured of the wins the trader showed you.
Now that you understand why you lose money while using trading indicators, apply them correctly to begin making money.