It is common for every new aspiring futures trader to try and find that one trading system or program which will remove the learning curve from trading and simultaneously remove risk while generating profit. This nearly always happens and is a folly in the futures trading industry. Because of the high amount of leverage involved in futures and the ability to make a lot of money really quickly. New traders will become blinded from the rationality that is the market is competitive and is not something that you can instantly pick up and become a huge success in. Unfortunately, purchasing a system, dumping in money and watch it grow exponentially is not how this industry works. In this article, I will cover some of what I believe to be some of the key indicators and system logic that new traders can begin using to find their edge in trading.
Before purchasing any trading system, look at it objectively and understand what you are buying and how it is designed to give you a trading advantage. If a strategy is boasting 90%+ win rates and insane returns – take a step back and think why is somebody selling a system, which would over time dilute their competitive edge. If a system is capable of making hundreds of percents on your money with virtually no risk – large financiers would be investing millions of dollars into that trader. Why would they choose to sell such a thing to the public?
Understand the basics
Moving Averages (SMA/EMA/LMA) are one of, if not the most fundamental baseline for a trading system. They operate under simple principles of price momentum in the expectation and anticipation of price continuation. Other methods involve looking for price retracements on key moving average levels suggesting that price is becoming exhausted and looking to reverse.
In certain market conditions, it can be profitable to simply buy on crosses above and reverse to sell on cross below. This however is highly ill-advised as a simple crossover strategy is not a suitable strategy for reliability and adequate risk management. Crossover strategies are better as entry conditions but often lag too much to be effective exits and tend to struggle heavily for rapid reversals.
Average True Range indicators (ATR) is an indicator which operates like steps following price. When the price is trailing higher you go up the stairs and when price is trailing lower you go down the stairs.
This is an extremely effective tool as a dynamic profit take / stop loss. Because of the nature of this indicator follows the advance and decline of price rather closely, you never leave too much on the table when it comes to profit or losses.
This indicator can pose problematic however and certain conditions can make this an ineffective tool. The ATR looks for price to either pass through or close above or below the ATR line and when this occurs, the ATR will reverse. If the ATR is configured to follow the price closely, you risk to have a lot of false reversal signals and when used as a take profit you might leave too much potential profit on the table. When the ATR is configured to follow the price loosely, you will get less false signals, but as a take profit or stop loss you might leave too much risk on the table.
Moving Average Convergence Divergence (MACD) is a very effective indicator when looking to analyze overbought and oversold conditions. The exhaustion of price is a crucial determining factor for reversals in price trends. This simple to use indicator is common with novice traders for it’s straightfoward use. The MACD oscillates between values as price moves, when the indicator value breaks above or below a certain range, it indicates that the security is overbought or oversold. When the indicator signifies for these oversold and overbought conditions, it is common to wait until the indicator reverses from that range to enter a trade.
When the MACD crosses the threshold for the first time, it is important not to enter a trade just yet as the continuation of price in relation to being oversold or overbought may continue for some time. Only until the reversal has become evident is the signal valid and actionable.
These 3 indicators prove to be invaluable tools for technical traders. They are effective and time proven which when used properly, can generate a good foundation for your strategy. Understand how these indicators operate and when they are able to generate good trading signals. Only with time and practice can you fully utilize the effectiveness of various technical trading indicators.