There is no single indicator that will produce 100% profitable trades. Therefore, choosing an indicator becomes a decision of personal choice, rather than right or wrong. A successful trader with a poor indicator may result in profitable trades while a good indicator used by an inexperienced trader, may most likely lose money.
So how do you go about choosing your indicator? The answer is not as hard to find as it may seem.
There are literally thousands of indicators to choose from. The place to begin is to first make a decision as to the type of strategy that you are going to trade. This will probably eliminate half of the alternatives. The indicator you choose should be designed for the type of strategy you are going to trade. This decision will also force you to decide what type of trader you will be. It is very important that you make some decisions on the big picture, the overall strategy, before you get to the details.
The indicator should not be totally derived from price. Traders, particularly novice traders, that lose money consistently are inevitably using price-derived indicators. The more removed you can be from direct price correlation, the more reliable and profitable your indicator is going to be. If you can use volume, range, advances and declines, new highs or new lows or open interest to modify the price-based indicator, it should become more effective.
Another way to deal with this issue is to combine non-price indicators with those that are price derived. This way you can start to filter your price-derived indicators with other types of data.
If you decide to use a standard indicator, its performance will improve if you use it in a different manner than it was originally intended. Since that if 95% of all traders lose money. If you want to trade profitably, you must trade differently than the other 95%. That means using standard indicators in unique ways.
The indicator and the way it is calculated should make sense. Study the formula and see if it is logical. Try to understand why this indicator is supposed to work and what market
action it is supposed to represent.
The indicator you choose should be profitable or close to break-even in its pure state without optimization or money management improvements. Starting with an indicator that loses money and trying to fix it is a much more difficult task than starting with a profitable indicator. If you start with a profitable base indicator, the chances of developing something that you would actually want to trade are greatly increased.
Become an expert on this indicator. Learn its personality and its little quirks.
Posted in 
Tags: 
