Using Technical Indicators to Develop Strategies

Looking for ways of using technical indicators for developing a trading strategy? Well, just we would like to clear the air, an indicator os not a strategy!
An indicator can help a trader in forecasting conditions of the market, whereas a strategy is a trader’s rulebook: Including interpretation and applying of technical indicators to make better-educated guesses about the future movement of the market.
Different categories of technical trading tools consist of the trend, volume, volatility characteristics, and momentum technical indicators. Traders use these multiple indicators to develop a strategy, though different sorts of technical indicators are usually recommended when using more than one. Because of using different indicators but of the same types, results in multicollinearity (i.e., a state when the same information is calculated multiple times). It needs to be avoided as it results in providing an inaccurate picture and also results in overcoming the value of other indicators hence less useful.
Therefore, traders should pick indicators from different categories such as one trend indicator and one momentum indicator. With one more indicator that should be used for confirmation ( for ensuring other indicators are picturing an accurate result).
Each indicator and its combination with another requires a keen knowledge of each indicator and its application to the trader’s style and risk tolerance. One merit of developing a strategy like these is to provide them the option of applying this strategy to the past data to evaluate the success rate of the strategy. This process is also known as backtesting. Of course, this does not result in guaranteed results only but it might help you in reducing risk.

Leave a Reply

Your email address will not be published. Required fields are marked *