Indicators are used by many beginners and even intermediate traders in their trading strategies. Indicators are potent tools, but they are only as good as the way they are being used. As opposed to what many people think, just applying an indicator on a chart and testing it against the price action does not guarantee success. Here, we will see how professional traders use indicators correctly to enhance their profitability.
Why Most Traders Struggle with Indicators
The new traders get caught up with using a wide array of indicators but mostly find none giving consistent profits. This is because the way they apply them as individual tools is just incorrect. Probably, one big mistake is searching for a “leading” indicator, which forecasts what will happen in the future. Although there are some indicators that may provide an edge, it is important to know how and when to use leading versus lagging indicators.
The Role of Lagging Indicators
First, it is essential to realise that all indicators are bound to historical data and therefore, by nature, lag behind the market. This cannot be considered a weakness but just one of its features to be exploited when appropriately used. For example, a 50-period SMA on a daily chart has been an important point of reference.
It might not predict the future price; instead, it shows where market participants are likely to take action based on mass psychology. When most traders see a significant level, like the 50 SMA, they are likely to make decisions involving selling, buying, or taking profit from their investments, which eventually alters the direction of the market.
Tapping into Mass Psychology
The key to trading with lagging indicators is to remember that they are a picture of collective behavior. When a price approaches the 50 SMA or any other popular level, it tends to hesitate as traders act on their strategies. Sometimes, the market can even break through these levels temporarily due to an outside catalyst such as an economic report or news event. However, prices often return to these levels once the initial reaction to the news dies down.
This behavior is exploited by more experienced traders who position their trades in anticipation of prices moving back toward these levels.
Trading the Mean Reversion Strategy
The high-probability approach, as far as professional traders are concerned, involves the mean reversion strategy. This approach assumes, over time, prices tend to go back to their historical mean. For example, if market stretches too far from the mean, such as the 50 SMA, there is a high possibility of snapping back. The whole idea flows on statistical probability and may result in a very strong win-loss ratio if used consistently.
A good example of this strategy is the rubber band trade by Dr. Barry Burns. It involves identifying when the price has moved far enough away from the mean to set up a potential reversal point. If this setup is traded correctly, then a profitable edge can be created.
Using Momentum Indicators Towards an Edge
Whereas lagging indicators are those that help to portray the structure of the market and the psychology of the mass, momentum indicators reflect both the strength and direction of a trend. Momentum takes into account the price change rate and warns that a market is either gathering steam or losing steam. This becomes essential to traders who like to jump onto a trend as early as possible, which may heighten the percentage likelihood of success.
Think of momentum as a speeding train: once it’s at high speed, it’s going to take some time to stop or change course. And if the momentum is strong, it will indeed be unlikely that the market may reverse direction anytime soon. And this is probably why most professional traders are into the use of momentum indicators since the early beginnings in the direction of the trend for higher-probability follow-throughs.
The Power of Proprietary Indicators
While common indicators such as the 50 SMA and momentum tools are helpful, many successful traders have proprietary indicators. Most of these are adaptations of well-known tools. By developing their own proprietary indicators, these professionals are able to identify signals others don’t see. An example is the proprietary momentum indicator developed by Dr. Barry Burns, which can be implemented on any trading platform.
These customized tools can better identify entry and exit opportunities, thus helping traders to stay ahead in the market.
Conclusion
Indicators themselves won’t make a trader profitable; it’s all about how to work with them. Experienced traders know how valuable different indicators are and when it is necessary to measure mass psychology with the help of lagging ones, and where one needs to see the strength of the trend, applying momentum indicators. Using them in such a way will help get attuned to the big market, promising great success.
To learn more about using momentum indicators, access Dr. Barry Burns’ proprietary tools at indicatorwebinar.com for a free webinar. With the right mindset and proper application of how to use the indicators, it’s time to take a step up in your trading strategy and rake in increased profits.
