This article will teach you the 10 rules for using technical indicators you need to know, to deal with any indicator successfully.
Technical indicators are one of the essential instruments that help traders have make money with binary options. Still, indicators only generate values. Success or failure when using technical indicators largely depends on your interpretation of the indicator. So what are the important 10 rules for using technical indicators?
1) 10 rules for using technical indicators – don’t ignore the chart!
Reading the price chart is hard. You need to know many simple and complex candlestick formations, have a solid understanding of trends, and at least some experience to understand what you see.
Indicators, on the other hand, generate a value you can interpret quickly and easily. Do not let the easy nature of indicators confuse you into thinking they are more important than the price chart. The success of your investment will determined by the price chart, and the price chart should be your main instrument to predict future price movements.
Indicators can only help you understand the price chart. Always remember that any indicator you use is only a modification of data derived from the chart. Therefore, no indicator can know more than the chart.
… continue reading more about the 10 rules for using technical indicators below the table.
2) Understand the indicator
To use any indicator successfully, you need to trust the indicator. The first step to trusting an indicator, you need to understand it. If you are bad at math, do not worry. It is more important to understand the fundamental concept behind an indicator than the details of its calculation.
Do you think that the basic assumption behind the indicator is valid? If so, you can use it for your trading. If not, you should not touch it. Never use an indicator you do not understand just because someone recommended it.
3) Trade what you see
Price patterns are just as important to successful trading as indicators and have the same power to predict future price movements.
When traded correctly, continuation and reversal patterns, trends, and candlestick formations can help you make a lot of money. Many traders do not use technical indicators at all and rely exclusively on price patterns. That alone should be reason enough to at least incorporate price patterns into your trading in some way, even if it is only to understand the big picture and the general market direction.
4) Support and resistance levels are important
If there is a well established support or resistance level, it does not matter which market direction your technical indicators projects for the next time. The support or resistance level is likely to dominate your indicator’s reading. You should therefore be aware of support and resistance levels in the market to avoid losing trades.
5) Trade the breakout
The most secure trading opportunity with the highest possible returns is the breakout. Learn how to trade the breakout successfully, and use technical indicators and price formations to find trading opportunities.
6) Understand convergence and divergence
With many indicators, when the indicator’s line starts to diverge from the market’s movement the current trend is usually in trouble. Learn to recognize such events and make the right decisions when they occur.
7) If you test your indicators, do it right.
While the standard parameters of indicators are usually the result of long and thorough testing, some traders chose to test their indicators with historical data themselves to find better settings. Often, the result is a set of parameters that only fits the historic price level data it was tested with, but is useless for any future use. Do not make the same mistake. Try to find settings that fit current market behavior, but do not overdo it.
Since you cannot predict the future, you cannot find the perfect setting for your indicator to use in tomorrow’s market.
8) Accept false signals
Using indicators is a numbers game. Do not expect your indicator to be right all the time. Expect it to be right often enough to make you money.
If your indicator generates a false signal, do not change all its settings and overthrow your entire strategy. Wait for a number of signals, ideally at least 100, and see if your indicator generates enough good signals for you to make money with it.
9) Do not search for a magic truth
In trading, there is no magic secret that can help you effortlessly make a lot of money. Accept that and work with what you have and what is proven over decades.
10) Stick with your favorites
There is an almost endless abundance of indicators and new indicators are created every day. Still, instead of trying them all and changing your strategy too often, pick your favorite indicator and stick with it. This way, you will get better results than with following every new hot idea.