– When beginner traders start exploring a good trading platform, they probably are a bit daunted by all the different indicators that are available. The most popular trading platform MT4 comes with a standard several dozen.
How do you know which ones to use? Are they all worth it? Do you really need to know all of them and what they do?
The thing is, picking the right indicators is part of the art of becoming a trader. Unfortunately for beginner traders, that makes it harder for them to get advice on how to pick the best set of indicators.
Some traders use a lot, some use very few. Analysts, who like having as much information as possible, often recommend using several indicators at once. Brokers who want to help their clients make better decisions will frequently say you should use several indicators, and not rely on just one.
And they are right, for good reason
The thing is, it’s quite possible to have too many indicators. In turn, this can lead to a thing that many traders call “analysis paralysis”.
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The point of indicators is to help cut through the market “noise”, so you pick the right points to trade. If you have too many indicators, they start to become noise themselves and make it harder for you to trade.
Part of the theory of using several indicators at once is to find confirmation on signals. If one indicator gives you a signal, and another doesn’t, then that trade is likely to be less sure than if two different indicators are giving the same signal. If you have three indicators giving you the same signal, then it’s even stronger.
Too many instructions
On the other hand, it is less likely for three independent indicators to give you an identical signal. That said, the likelihood of getting the same signal keeps dropping the more indicators you add. In fact, if you have a dozen indicators that you’re waiting for all of them to give you the same signal… well, that just might not ever happen. And you won’t actually get any trading done.
So, it comes back to risk management, which really is the core of successful trading. If you use more indicators, then you are likely to get stronger signals, but less often. That is, assuming these are independent indicators and not indicators that are based on the same mechanic, like different moving averages.
If you want to trade more often, then you might want to use fewer indicators. However, that means your signals are weaker, and your trades are less likely to work out.
It’s all about balance
In the end, the number of indicators you should use is a function of your strategy.
A lot of people will try to tell you to use more or fewer indicators. And there are plenty who want to sell you this awesome indicator that always works (but they need to sell it to you for some reason because they aren’t using it to become bazillionaires themselves).
The reality is that you should use indicators depending on your risk profile and trading style.
There isn’t a “right” or “wrong” number, so you shouldn’t let someone deter you based simply on how you don’t use “enough” indicators. You might instead adjust your risk profile to improve your profitability. Alternatively, having more indicators than someone else might work better for you because you take longer-term trades which offer better risk ratios.
Just be aware that when we analysts say you should use several indicators, it usually just means that we want you to trade safely. It doesn’t necessarily mean that you should go out and get an encyclopedic knowledge of all the indicators.
Article by Orbex
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