16 Minute Read

Rookie Corner: The Trading Springboard

May 28, 2020

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Last Update: August 2021

Hello All!

I trust this week’s post finds you well.

We are still dealing with the Coronavirus complications but it appears that most countries are trying to slowly re-open their economies. This experiment could be a beacon of light for some folks and a very scary prospect for many others. Where you fall in this spectrum depends very much on how you view the overall impact of the current pandemic situation. I will save you all the misfortune of listening to my thoughts on this current situation as I have as many thoughts and feelings as the next person and they range all the way from fear to rage. Now, as a trader, feelings like the aforementioned can only spell doom in the long run and so our job as traders and investors is to drown out the noise and make solid well-articulated trading decisions that put us squarely in the path of profits.

That brings me to this week’s topic of discussion, INDICATORS, use them or lose them?

Rookie Corner - The Trading Springboard - Looney Tunes High Dive

If one is so inclined and decides to go into the Thinkorswim platform and click on the science beaker type thing that addsINDICATORS to our charts one can see that there are several hundred different INDICATORS. That, in my humble opinion, is a boatload ofINDICATORS and I have to ask myself, why so many and what do they all mean? There are so many different INDICATORS and they all do and mean so many different things that as far as I am concerned that is just asking for a case of analysis paralysis. Have you ever felt this way?

I mean really, Chaikin Money Flow, what is that? LOL. Just kidding, I know what it is and what it is supposed to mean, or at least what I have been taught what it means but for me it means nothing because I choose not to use it. For someone else, it might be the most useful tool in their trading toolbox. I think this is where the need and want for so many INDICATORS lies. There are so many of them that we need to figure out which ones have meaning to us and which ones can actually help our trading and not hinder our analysis in such a way that it makes decision-making even harder than it is, to begin with.

If you have been trading for a while you have probably solved this INDICATOR issue and you have picked your favorites and use them religiously. I actually have some trading pals that make their own INDICATORS because they were unsatisfied with the ones that are readily available. These friends of mine are hardcore and they understand that any INDICATOR only has value if it fits with your particular system and trading personality. As they said in the OJ Trail, “if it does not fit you must aquit!”. Sorry, that was a dark reference but what I was really trying to say was that only YOU can decide what works for you and what fits with your system, and sometimes that requires creating your own INDICATORS like my pals have.

I, myself, am a bit old school and I am extremely selective about the INDICATORS I choose and use. As a matter of record, I used to obtain from using any INDICATORS for the first several years that I traded. The reasons for this were twofold. Number one was that my first mentor had no use for any INDICATOR and he was wildly successful at trading and therefore I saw no value in using them. The second was that I felt that if I could learn to read the price action on the chart that there was little value in using INDICATORS.

I have softened my stance on INDICATORS since my early days of trading although I still shy away from the lion’s share of them as I still believe that any INDICATOR is only as good as the trader that is using them. I can honestly say there are only four or five INDICATORS that I will even consider looking at because at the end of the day I still believe price is king and it works for me and my trading systems.

I am quite fond of one INDICATOR and I do use it on occasion but I always remember that the price action comes first and that any INDICATOR is just a heads up to say hey be cautious! I want to say that actually placing a trade based solely on an INDICATOR is a recipe for disaster in my opinion and I say this now because I have seen many rookie traders try to live and die by INDICATORS and most of them died, metaphorically speaking. The INDICATOR that I think is the most useful of them all is the moving averages.

Using the moving averages can give us that heads up to say that things have changed in a price chart or that things could be ready to change. I use 3 different moving averages, some exponential and some simple and then looking at these INDICATORS I can tell what direction I believe the charts are going and I can see if a change in direction is likely to occur if the moving averages crossover, and I can also see changes in momentum in a chart before the move happens. I can see all these things but I don’t act on them alone. As a trader who has been trading for a while now, I have had to develop saint-like patience and using the moving averages to see all the things I mentioned above I have had to use that patience to wait for the price action to confirm what I see in the INDICATORS before reacting. I have done this the other way around and it seldom works out the way I would like.

The moving averages can be a springboard for a trading idea but at the end of the day I need to see the price action progress in the manner I am expecting before I take action so at the very least I start out my trades in the right way before putting my hard-earned money at risk and I believe any trader new or experienced should do the same.

So, in conclusion, do yourself a favor and if you are going to use INDICATORS make sure they fit you personally and work with the systems you are using and be sure to understand that they can only be a springboard to a trade and not the whole dive!

In next week’s blog, we will take a look at how the three concepts I spoke about in the moving averages can work out as a springboard for trading ideas.

Happy Trading,

Coach Holmes

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