It never ceases to amaze me how many people I interact with that when asked this simple question stammer. The question is if they could only use one indicator what would it be. Waiting for the answer to come can produce some funny and even uneasy pauses accompanied with jumbled thinking out loud. I’d say it’s akin to asking a parent of five kids to name a favorite, with all five kids standing there waiting for their parent to answer.
I ask this question to find out more about what types of indicators they use and the reason behind their use. As they begin to think out loud I can pick up on themes as well as inconsistencies. I’m not trying to force them to use one indicator but rather trying to get them to really be picky and reduce the clutter on their screens. Perhaps they are using an indicator that they don’t really understand how it works but read about it in a book or blog.
The challenge I throw out to them is to keep their trading simple and that’s a task best accomplished starting with reducing the use of indicators. Here’s some questions that help in defining a market approach and reducing the noise:
- Was the setup that got you in the trade the same that took you out (think of the Turtle Traders or anybody that uses a Donchian channel system)?
- What indicator are you using to manage risk and is it consistent (e.g. a multiple of the average true range, prior support/resistance level)?
- What data periods (day, hour, week, etc) are you finding your setups with?
- How often do you look at your trade metrics to see which trades went best?
- Is there any consistency(as far as indicators used) in the setups that led to the best trades found in your trade metrics (you’d be able to answer this one easily with a detailed trading journal)?
The point of the questions above, and others like them, is to get them thinking about what actually works for them. I’m looking to help them define their best setup. Perhaps the best setup is not a setup that they like or even use that often. Information like that leads to the development of the individual and is a beautiful thing to see.