Tuesday, March 06, 2007

What are your indicators designed to do?

What are you seeing when you look at an indicator and what does that indicator tell you? Is this indicator giving me a bullish or bearish sign, and what should I expect the price to do with regard to this indicator. If you are using indicators for a trade signal, then you must know what the purpose of the indicator is. If you trade based off of a moving avg. crossover, then you would expect the price to revert to where price previously came from, giving you a trading methodology that is similiar to a mean reversion trader. When you use the ADX indicator you are trying to see if there is a clear trend established, which make you a momentum trend trader. Combine the moving average crossover and ADX and you should be covered for both types of trading environments. What is the problem with indicators? They tell you nothing about the size of the bets being placed by the market participants unless you are using the volume profile indicator.

Where is the biggest volume spike in the first hour of trading?
Where is the high/low for the first hour of the day and where is the price 2 hours later?
Is price above VAH or below VAL after 11:30am? Does this indicate a trending market for price to be in this area during this time period?
How can I justify the trade entry based off my trading methodology?
Does my trading methodology look for trades based on a good risk to reward ratio?
What should I be watching intraday besides ER2 that will tell me the health of the market?


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