7 Common Mistakes Traders Make When Using Indicators  

Technical indicators can help analyze price action, detect trends, and confirm potential trade opportunities. They can be powerful trading tools when used properly. They aren’t always used well, however. Here are seven common mistakes traders make when using indicators.

1. Ignoring Market Context

Indicators provide specific data, but that data has a larger context. Focusing on indicators to the exclusion of the broader market context can result in misinterpretations, poor trading decisions, and, ultimately, unexpected losses.

For example, a stochastic indicator might show overbought. The correct interpretation of just the one indicator would be to sell, as the suggestion is an imminent downswing in price. If the equity is still in a strong upward trend, however, its price could continue to increase despite the overbought signal. The same is even more true if there’s currently a run-away bull market.

Don’t make the mistake of assuming that an indicator shows a straightforward buy or sell. You’ll likely have more success if you interpret indicators within the context of the overall market environment.

2. Ignoring Position Sizing

The other major context to consider is your portfolio. Specifically, how much of your portfolio should be staked for any one trade? The answer to this will vary depending on your portfolio, trading strategy, risk tolerance and other factors. Whatever your answer is, though, it’s important to use correct position sizing.

Poor position sizing can lead to oversized portfolio losses, and even the most well-researched trades can fail. Even if you identify the perfect technical setup and ideal fundamentals, an unforeseen black swan event could still cause the best trades to fail. You don’t want a major loss to devastate your entire (or most of) your portfolio.

Long-term success in the markets requires extensive knowledge of trading. Don’t just study indicators, but also educate yourself on portfolio management, diversification strategies, and the other aspects of investing. That way, a hay-wire trade will only result in a modest portfolio decrease.

3. Understanding the Indicator Poorly

Don’t be hasty to use a “new” indicator quickly. Basing trade decisions on an indicator that you just learned about can result in mistakes, and you can easily take or leave a position when it’s not really right to.

Anytime you start to learn about a new indicator, delay using it for a while. First, educate yourself on it well — and read some critiques so you understand the indicator’s limitations as well as its insights. Then, spend some time paper trading based on the indicator. Incorporate an indicator into your live trading only after a pattern of successful paper trades using it.

4. Relying on Just One Indicator

Relying on just a single indicator to make trading decisions is risky, as no indicator is always perfect. It’s too easy to have a false signal without confirmation from another indicator or signal.

In short, indicators work best when combined to confirm signals. You might confirm a moving average crossover with a stochastic oversold, or a burgeoning downward trend with high volume.

You’ll have to figure out which indicators work well for you, and you almost certainly won’t use them all. Find a few that can help confirm one another, though, and you’ll be able to make more confident decisions.

5. Using Just One Type of Indicator

When selecting indicators, it’s best to use a few different types. There are plenty of different types:

• Trend-following indicators (e.g. moving averages)
• Momentum indicators (e.g. stochastic oscillator, RSI)
• Volatility indicators (e.g. Bollinger bands)
• Volume-based indicators (e.g. volume weighted average price)
• Support and resistance indicators (e.g. Fibonacci retracements)
• Other specialized indicators

Of course, there are many other indicators not listed here. Whatever ones you choose, you’ll have a more well-rounded picture if you select indicators from several of these types. The best confirmation is when multiple types of indicators suggest the same possible action.

6. Not Checking Longer Time Frames

When reviewing charts and indicators, you’re going to primarily use one, two or three time frames. A day trader might use the 1 minute, 3 minute and daily charts, for example. A swing trader might rely on the 1 hour and daily chart.

No matter what your primary time frames are, don’t forget to occasionally look at longer — much longer — time frames. The weekly and monthly charts may point to a strong trend that won’t break, even if the shorter time frame charts suggest they will.

You won’t be checking a longer chart constantly, but periodically look at the weekly and monthly (or daily and weekly). For instance, you might check these once weekly if you constantly follow the same equities.

7. Not Customizing an Approach

There are numerous indicators, and at least as many ways to use them. Traders who see long-term success don’t rely on someone else’s strategy, but develop their own technical trading strategy. It’s natural to start by following someone else’s strategy, but ultimately you’ll do better with your own strategy, understanding and analysis.

Developing your own strategy starts with understanding different technical indicators and what they show. You then select the indicators that are most directly relevant to your strategy, and learn how they complement one another. This is the best way to develop your own technical trading skills, so you can pursue your own success in the markets.

Get the Right Technical Indicators Software

Avoid these common mistakes with technical indicators, and you’ll be well-positioned to trade the markets. The only other thing needed is software to help you monitor and analyze indicators.

You’ll find the software you need here at Affordable Indicators. Whether you use NinjaTrader, TradingView or another platform, our software integrates seamlessly for a streamlined process. We can help you track support and resistance, key levels, price action, moving averages, and much more. Find the one or two that track the indicators you use, or choose one of our suites to track multiple different indicators in one place. Either way, we’re here to give you the information you need for making strong technical trades.