8. “Adding random variables makes it extremely difficult, if not impossible, to determine what works and what doesn’t.”
Here’s the truth:
Adding more indicators on your chart doesn’t mean that the trade is guaranteed to be a winner.
It just adds more noise and possibly keeps you from making trading decisions.
But wait, there’s more!
The more indicators or random trading rules you add into your plan…
The harder it is to pinpoint which one of them works and what doesn’t.
Again, what’s the solution?
Well, it’s a solution that’s hard to stomach, but you must choose ONE indicator for:
- Trend filter
- Stop loss
- Take profit
Let me give you an example…
One indicator for trend filter
As you know, you can both long and short the markets.
To know which direction you should trade, you can consider using the 200-period moving average:
If the price is above the 200 MA = You look for long setups
If the price is below the 200 MA = You look for short setups
Simple, am I right?
One indicator for entries
For this example, I would be using the 14-period Relative Strength Index indicator.
To put it simply…
Wait for the price to close below RSI 50, then enter when the price closes above RSI 50:
That’s it, a simple and objective way to enter a trade!
One indicator for stop loss
At this point, I’m sure you already know how important having a stop loss is.
Now the question is, which indicator can identify where your stop loss would be objective?
In this case, I suggest using the Average True Range indicator then multiply its value by three (3 ATR) as a buffer.
How to use it, you may ask?
Just subtract your entry price from the ATR value:
Last but not least…
One indicator for taking profit
Unfortunately, how you take profits will depend on your trading method, so there could be many answers.
But if you are a trend follower, for example.
Then you can use the 20-period moving average.
Meaning, you will not sell your position until it closes below 20 MA:
Now I want you to promise me that you’ll backtest this strategy first before trading this live.
Can you see how these indicators complement and do not contradict each other?
You see, technical indicators are not magical lines on your chart that bring in profits.
They are tools, and how you use those tools makes them truly effective and efficient!
So, once you already have a set of objective rules in place, the next thing you want to do is to…
Execute your rules for 20-30 trades regardless of the result and find patterns on how you can improve them.
The reason why you’d want to use one indicator per category is for this exact reason:
To make it possible to know what works and what doesn’t.
Can you see how it’s all coming together?
Of course, it’s not easy to execute 20-30 trades flawlessly.
That’s why if you find that you’ve broken your trading rules, more than 50% of those trades…
It means that the only thing you should be improving is your trading routine and not your trading strategy.
On the other hand…
If you have consistently executed 20-30 trades without breaking your rules (mostly), then you now need to review your past trades and ask:
- Could you have prevented losing trades if you had used a 100-period moving average trend filter instead?
- Could your entry price be better if your RSI period is 7 instead of 14?
- Could you have reduced losses or stayed in the trade longer if you had a wider stop loss by using 6 ATR instead of 3 ATR?
- Could you have taken more profits if your trailing stop loss was an 8-period moving average instead of a 20-period moving average?
At this point, I don’t know since only your results will be able to answer those questions!
But this is what it means to find your “edge” in the market.
Not my edge.
Not other’s edge.
But YOUR edge in the market.
If you want more ways on how to journal your trades, check this out: How to Create a Trading Journal and Find Your Edge in the Markets
Whew, that’s a lot of lessons!
Applying them is no easy task, so feel free to get back to this guide from time to time.
But for now…
Let’s do a quick recap of what you’ve learned today.