Financial Sense

Understanding your trading Indicators

by Gail Mercer, Hawkeye Traders | May 26, 2009

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What can indicators do? What can indicators not do?

Part of any trader's success is their indicators. Every trader needs a good set of indicators, or strategies, to help him consistently take profits from the market. Your trading indicators are important foundation in your daily trading. A good system with rules, discipline and trading skills can produce good results. However, remember, indicators are simply tools. Without knowing price action or different market conditions any trading tools can become useless. As we always teach “Indicators are only 10%, 90% is the trader”.

An architect, with a good set of tools, can make beautiful things because he has a plan, he has the skill to build, and he knows how to use his tools. However, these same tools do not make him an architect -- his skill and education make him an architect. Another example is if your handwriting is bad, you cannot blame the pen you are writing with. Instead you need to practice your handwriting skills. Every trader must know how, when and where to use the tools for his consistent success.

And when it comes to gaining experience, remember, "Rome was not built in a day, but years”.
Why are traders struggling even when their indicators give good signals?
It can be a number of different reasons, lack of guidance, emotions, trading psychology, or undeveloped trading skills. Trading skills cannot be developed by simply reading a few trading books or watching a couple of videos. Trading skill can only be developed by “practice”. Traders have to act without hesitation. Three important skills a trader has to develop are Confidence, Control and Consistency. Trade what you see on the chart without any opinion.

There are a lot of software vendors simply teaching their indicators. Many of them promise that you will be a millionaire in weeks by just using their indicators. However, believe it or not, no indicator works 100% all the time. The reason is each second in the market is different.

Indicators are programmed based on past performance. We are expecting “history to repeat”. We are trading the "probability" that it will.

Additionally, your indicator can only give you a piece of information about the market. It cannot help you to develop your skills or trading psychology. A trade set-up simply explains “MAY BE”. Different market situation needs different set-ups, an understanding of price development, and an understanding of who the players are.

Lessons from Legends; a basic understanding on the market
Remember, market moves based on supply and demand. For every seller there is a buyer. The fuel that drives the price in the market is Volume not MACD, Bollinger bands or any other indicators. It is only buyers or sellers. The volume is the total number of shares, contracts or bonds traded during a specific period of time. It can be daily, weekly, monthly, minutes or tick volume in any trading markets. Each volume bar represents the action between buyers and sellers. When demand (buyers) increases supply (sellers) decreases or when supply increases demand decreases. When there is a change in price, it is the result of change in demand and supply. Typical volume only measures the number of buyers and sellers in the market for that particular price bar. This type of volume measurement fails to look at the range of the bar or the open/close of the bar. So if the number of buyers is greater than the number of sellers, the bar is green. If the number of sellers is greater than the number of buyers, then the bar is red. This is a very simplistic measurement of volume and is only valid for that particular price bar.

With Volume Spread Analysis, we take an in-depth look at not only the current price bar but the previous price bars, as well as the open, close, high and low of the bar. In other words, when looking at the range of the bars, who had more control, buyers, sellers, or was the volume neutral. By using this method we can actually identify when the professional money is entering or exiting the market. This will allow you to understand the price development.

If you are using Volume Spread Analysis in your trading, please ask yourself the following questions. Even you are not a member of Hawkeye you can apply these principles for your trading career success.

Volume5.gif

The Kiss Indicator simply represents the ratio of buyers and sellers in the future market. The concept of the Kiss indicator is a broad measure of changes in supply and demand. The KISS indicator gives you an overall understanding of the market immediately. The Kiss is useful to show market momentum, as well as strength, of the futures market intra-day. A futures trader can immediately see who is in control of the market that particular day, buyers or sellers and sometimes no one. If you are a futures trader, stop and ask the questions on the image below.

kiss5.gif

Forex Trading and Volume
FOREX does not have true volume; with Hawkeye we use “Tick Count” for volume. If trading a tick chart, all volume bars will be of the same height. However, if we use a minute chart, then we can see the difference volume bar heights. The difference with the VSA indicator and a normal volume indicator is the measurement of volume per x amount of bars, plus a standard deviation. This allows us to see when buyers or sellers are coming into the market earlier. The final piece of the puzzle for FOREX traders was to find a way to measure the currency strength and weak that helps to avoid choppy markets.

FATMAN25MAY09.gif

The Hawkeye Fatman is an excellent indicator for forex traders to keep them from out of trades that go nowhere. The Fatman indicator displays the strength (or weakness) of a currency when compared to 16 other currencies. The indicator shows when a currency is strong (upward movement) or weak (downward movement) or not moving (sideways). To enter a trade with Fatman, look for the currencies that are moving against each other, ie one is moving up and the other is moving down then simply wait for confirmation by the Hawkeye indicators to enter.
Visit our website http://www.HawkeyeTraders.com more videos and chart examples.

Final Tip of the day

Remember 3 important skills – “Confidence – Control – Consistency = Trading Success”

Copyright © 2009 Gail Mercer
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