As a trader, you are always looking for ways to improve your trading strategy and increase your profitability. One powerful tool that can help you achieve this is technical indicators. Technical indicators are mathematical calculations based on a security’s price and/or volume, and they can help you identify patterns, trends, and potential trading opportunities. In this post, with the help of traders and developers from Advantage Trading, we’ll explore how you can use TradeStation’s technical indicators to improve your trading strategy and gain an edge in the market.
#1. Choose the Right Indicators for Your Trading Style
Choosing the right indicators for your trading style is a crucial step in developing a successful trading strategy. There are hundreds of different technical indicators to choose from, and each has its own strengths and weaknesses. Some indicators are better suited for trend following, while others are better for momentum trading or volume analysis. It’s important to choose indicators, that you know and understand and that align with your specific trading style and the market conditions you are trading in.
For example, if you are a trend trader, you may want to focus on indicators that help you identify the direction of the trend and confirm its strength. Moving averages, trend lines, SuperTrend indicators, and even the popular Relative Strength Index (RSI) are all examples of indicators that can be useful for trend following. On the other hand, if you are a momentum trader, you may want to focus on indicators that help you identify changes in momentum and potential turning points. Examples of momentum indicators include the Moving Average Convergence Divergence (MACD) and the Bollinger Bands. On top of the most popular indicators, there are dozens of other, more complex tools. Some, like the ADX indicator, were created a long time ago, but are still popular among investors. Others, much newer, take inspiration from physics and signal processing in order to filter signal from noise. A good example is tools created by John Ehlers.
When selecting indicators, it’s important to consider not only their individual performance but also how they work together. Some indicators may work better in combination with others, providing a more complete picture of the market. For example, using both SuperTrend and volatility indicators can provide a more robust indication of a trend’s strength and potential reversals.
It’s also important to consider the market conditions you are trading in. Different indicators may perform differently in various market conditions. For example, trend following indicators may work well in a trending market but may produce false signals in a sideways market. On the other hand, oscillators may work well in a sideways market but may produce false signals in a trending market.
A study provided by Advantage Trading shows, that apart from market conditions, there is another issue to consider – the type of bar that the raw tick data is transformed into. They show, that using fixed range bars instead of regular time bars can be beneficial in generating cleaner signals, and more robust results.
#2. Combine Indicators for Better Results
Combining indicators is a popular approach among traders to gain a more comprehensive view of the market and generate more accurate trading signals. By using multiple indicators that complement each other, you can filter out noise and false signals, and get a more accurate assessment of market conditions.
There are many ways to combine indicators, and the approach you choose will depend on your trading style, the time frame you are trading, the market conditions you are trading in, or the bar type that you are using. One common approach is to use a combination of trend-following indicators and momentum indicators. For example, you may use moving averages or SuperTrend (aka Trailing Lines) to identify the direction of the trend and the strength of the trend, and then use an oscillator like the MACD or RSI to identify potential turning points and changes in momentum.
Another approach is to use multiple indicators of the same type but with different parameters. For example, you may use two moving averages with different time periods, such as a 21-day moving average and a 63-day moving average or RSI(2) with RSI(14), to identify the short-term and long-term trends. This approach can help you avoid false signals that may occur when using only one fixed setting for a given indicator.
It’s important to note that while combining indicators can be a powerful approach, it can also lead to over-analysis and confusion. Too many indicators will lead to conflicting signals and even analysis paralysis. It’s important to select a few key indicators that align with your trading style and the market conditions you are trading in, learn the most you can about them, and use them consistently over time. Having more then 3-4 indicators will do more harm, then good.
#3. Use Custom Indicators to create your Unique Approach
Using custom indicators is a way to differentiate your trading strategy from others in the market. Custom indicators are designed specifically for your trading style and objectives and can provide unique insights into market movements.
Custom indicators can be developed in a variety of ways. One approach is to modify existing indicators to suit your specific needs. For example, you may want to add a filter to a momentum indicator to reduce false signals or modify a moving average to account for the volatility, or a specific characteristic of a particular market.
Another approach is to develop entirely new indicators based on your unique trading strategy. This approach requires more advanced coding skills but can provide a significant competitive advantage. There is a chance, that your indicator will answer the question about price behavior that nobody asked before you. You might gain at least a temporary edge in such a rare but still possible circumstance.
Custom indicators can also help you identify trading opportunities that may not be visible with standard indicators. For example, you may develop an indicator that identifies patterns in volume or price action that happens during specific trading hours or a bar formation that signal potential turning points or breakouts.
#4. Backtest Your Strategies and Manage Risk with Technical Indicators
Before using any new trading strategy, it’s important to backtest it with historical data to see how it would have performed in the past. TradeStation’s backtesting capabilities allow you to test your strategies with real market data and evaluate their performance using a variety of metrics. You can see if a strategy brings profit, how deep the drawdowns are, how much of the profit is taken by slippage and commission, how and when it trades, how long it is in the market etc. Thanks to this information, you can decide if it’s worth trading live.
In conclusion, regular and custom technical indicators can help traders gain an edge in the market and achieve their trading goals. By choosing the right indicators for your trading style, combining indicators for better results, using custom indicators for a unique approach, backtesting your strategies, and managing risk, you can maximize your profitability and minimize your risk.