As a trader, performance is key to success. Many traders find they need to have a clear set of criteria in order to make sure they are operating their business effectively and making the best use of their resources. Having an effective set of directional indicators is one of the ways in which this can be achieved.
A directional indicator is a statistical value derived from the information contained in historical market data. Examples include the Moving Average, Stochastic, and Relative Strength Index. These indicators assess the price changes of investments to determine which direction the price is likely to move, thus providing a useful tool for traders to make informed decisions.
When selecting directional indicators, traders should look for items that respond quickly to changes in market conditions and that have easily understood data points for interpretation. Some items that meet these criteria include Moving Average Convergence Divergence (MACD), Average Directional Index (ADX), Commodity Channel Index (CCI), and Bollinger Bands.
Traders should also ensure that the character of the indicator that they are using is compatible with the style of their trading. For example, a momentum-based indicator like the Moving Average would work well for short-term traders while a trend-oriented indicator might be more suitable for traders with a longer-term outlook.
At the same time, it is important to be aware of false signals. Some indicators, such as the Relative Strength Index (RSI) can cause losses if relied upon too heavily. Similarly, RSI divergence can cause price reversals if traders over-rely on the indicator when making their trading decisions.
Traders should therefore take the time to ascertain the accuracy of the indicators that they are using, as well as the degree to which they can trust them. This includes testing the indicator on historical data from different markets to assess its effectiveness, as well as conducting backtesting to ensure that the data points that it produces will actually lead to gains.
Finally, traders should consider how they can combine different indicators and analyze the broader market environment in order to make the most informed decisions. By combining several directional indicators, traders can assess the broader market conditions and look for areas of opportunity as well as potential pitfalls.
By following the aforementioned criteria, traders can ensure that they are using directional indicators that have been specifically tailored to their individual trading strategies and that have a demonstrated track record of successful assessments. When applied properly, these indicators can go a long way towards ensuring that traders are able to maximize their returns and make the most of resources.
