Remember last week I asked for your feedback on my “Summer Special” trading report?

I had three ideas in mind and asked which you’d prefer to see fully developed. I also asked for your own suggestions of other trading topics you’d like me to cover…

Well, the response was fantastic!

I’ll knuckle down and get to work on the report very soon, so you’ll have to wait and see which topic had the most demand!

But it’s given me loads of new ideas to develop for you. Some of them might not lend themselves to the full blown report, but nevertheless they are still perfect topics for us to address right here in the weekly newsletters and on the new and soon-to-be-launched website.

It means if you took the time and trouble to share your wishes with me, you definitely WILL see them covered one way or another.

And one hot topic which did get requested repeatedly was technical trading indicators.

If you were one of those traders asking for more background info and indicator trading tips I’ve got great news for you… there’s going to be a complete section of the new website dedicated specifically to indicators.

Over the coming weeks and months we’ll be looking at a wide range of indicators – some commonly used ones (that you can also deploy in uncommon ways), some solid stalwarts, and also some real cutting-edge ones.

(Did you know there are now oversold/overbought indicators constructed by monitoring and factoring in trader-chatter on social media networks? How times change!)

Anyway, the website is going to be the perfect place for us to get together on this. Not only can we look into setting-up and using the various indicators, we can also update each page with timely chart examples and also open up a forum style chat for each one. It means we can delve progressively deeper and each trader can follow along at his own pace.

Yes, that’s all in the pipeline, coming soon. But in the meantime I don’t want you sitting there hungry for information and feeling deprived!

So this week, I thought we’d take a high-level overview of trading indicators – what they are and what they can do for you.
So first of all, let’s go right back to basics…

What exactly are trading indicators?

When we talk about using trading indicators, we’re generally dealing with pure technical analysis – no fundamentals, no number crunching.

At the very highest level, we have the elements of price and time. They are the two ever present building blocks we have at our disposal when we step in to analyse the market (some traders also disregard time and trade off price alone).

If you used no other tools than price and time you’d be a price-action trader (also known, tongue-in-cheek, as a ‘Darksider’ or ‘Jedi’).

There can be a certain amount of pride involved if your trading has evolved to the point where you trade just by following the order-flow on the chart. But there’s certainly no shame in using additional analysis tools. In fact, trading indicators can be key components in helping train your eye to spot price-action patterns setting up in the first place.

You might even be perfectly happy using indicators to generate your entry/exit signals and never have to bother paying attention to what the market price is doing on a bar-by-bar basis. There’s no right or wrong way to approach the markets – that’s the beauty of trading…

If a particular indicator helps you find good trades – and provides you with a profitable edge – you should grab it with both hands!

So think of indicators as little ‘Apps’ that can assist you with your decisions. They are pieces of computer code or small software programs that come built into Metatrader or whichever trading platform you use. They manipulate pure price and time data to tell you a different part of the market’s story and the different indicators all have their own little job to do…

There are indicators designed to help you spot and follow the prevailing trend. There are indicators to help you fine-tune your entry point. And there are indicators to help you find exit points, they suggest potential reversal or stall points in the market.

But the main thing to remember is that there’s no one ‘Magic Tool’. Each indicator has its own merits. But equally, they each have their downsides if used in the wrong way. For example, worshipping a trend following indicator in a sideways, range-bound market is going to drive you crazy with false signals.

You need to use a bit of common sense and pull out the right tool for the job. Just because you have a shiny hammer, don’t see every situation as a nail that needs knocking-in – be prepared to use your screwdriver from time to time too!

Why use technical indicators?

Let’s now go over those three main areas where we can put indicators to use for us. We said we could use them to help identify and follow the trend. We said they can help find entry points for our trades. And we said they could help find good exit points…

1) Trend Following Indicators: The advantage given to you here is an obvious one – if you’re trading in line with the current dominant force in the market (i.e. with the trend) your trades have a much higher probability of working out in your favour. You can sometimes get your timing wrong and STILL walk away with a fistful of money – the underlying dominant force in the market propelling your trade into the green anyway. Indicators that can help you keep on the right side of the trend include: Moving Averages, MACD (Moving Average Convergence/Divergence), Keltner Channels.

2) Trade Entry Point Indicators: Once you’ve identified the prevailing trend, you can look for a high-probability window of opportunity to open a new position or add to your existing. For example, if we’re in an up-trend, you can look to buy on the dips and let momentum carry you along as the market sets off again to the upside. Oscillator type indicators can help you with their overbought and oversold zones. In our uptrend example you’d wait for the indicator to dip into oversold territory and look for a buy-trigger to get you long. Oscillators that can help guide your trade entries include: Stochastic, RSI (Relative Strength Index).

Hint: You can use your trend following indicator to give you a directional bias and THEN use an oscillator to zoom in and give you an entry signal.

3) Trade Exit Point Indicators: Ahh, the age-old question. Once you’re in a trade, where’s the optimum exit point? You’re never going to get a perfect solution (and you can waste years trying!) but there are one or two indicator tools that can help give you an objective way to find your exit points:

Parabolic SAR is one self-contained exit system. It calculates a new location for your stop-loss order every time the market prints a new bar. It self-adjusts according to volatility and time spent in the trade. It’s not perfect but it can help keep you in a trade that breaks out for a real home-run.

Bollinger Bands are another helpful exit tool. They expand and contract as volatility enters and leaves the market. They can help you find realistic targets for your break-out trades – a touch of one of the outer bands gives you a warning the market may be temporarily over-stretched.

Right, after that little overview I’m fired up ready to get stuck deep into individual indicators for you!

Tell me which you’d like to see covered first. Are there any you’ve tried to use but struggled with? Any you’re itching to have a look at but don’t know where to start?

Shoot me an email – kato – and let me know.

Be Prepared: Market Moving Data Coming This Week (London Time):

Wednesday 25th June 2014:
13:30 USD Core Durable Goods
13:30 USD Gross domestic product

Thursday 26th June 2014:
10:30 GBP BOE Carney Speaks

Friday 27th June 2014:
09:30 GBP Gross domestic product

Monday 30th June 2014:
15:00 USD Pending home sales
Tuesday 1st July 2014
05:30 AUD Australian Interest rate decision
08:55 EUR German manufacturing PMI
09:30 GBP Manufacturing PMI
15:00 USD ISM Manufacturing prices

I daren’t make too big a mention of England’s World Cup progress as we wrap up this issue!