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Saturday, November 1, 2008

Using Technical Indicators in Your Trading Plan

By Leroy Rushing

Adapting technical analysis for use in your trading plan is what turns many traders profitable. No longer are you exposed to the risks of your own emotions and your computer models rattling in the back of your mind. Instead, indicators tell you when to trade based on analysis of the market; though the human brain is powerful, it's no match for a well suited technical analysis indicator.

Making the change

Adapting technical analysis into a current trading plan can be difficult, especially when the previous trading plan was focused on your personal views of the market rather than computer analysis. There are many ways to build a trading plan that will both satisfy your trading goals, and through the use of proven strategies, your desire to produce consistent results.

All technical analysis

Many analytical traders like to use 100% technical analysis to complete a trading plan that works for them. However, if you are accustomed to developing your own analysis, this might not be a comforting switch of plans. To transition to a fully technical analysis trading plan, sometimes it is necessary to scrap the previous trading plan altogether and build from the ground up with the newly found technical analysis systems.

Mix technicals with fundamentals

Using technical analysis as a guideline rather than a fully fledged system may be more compatible for your own type of trading. If you're building strategies for gapping up, a complete technical analysis platform may not be suitable, as the gaps down are hardly recognized in technical indicators - and the same is true for strategies for gapping up. If this strategy sounds more like your own, consider some technical analysis indicators as guidelines. For instance, if you were to trade momentum strategies, the preferred indicator would be the Relative Strength Index to show the strength of the current trend.

Technical analysis can seem overwhelming

To new traders, the idea of many different computer models and formulas to decide which way the market will turn might seem like overkill, but the fact remains that technical analysis is one of the best ways to analyze the markets with a standard method. Your emotions are never as stable as a computer model; computers think logically while humans think emotionally. Your trading system won't feel bad and trade more when the market runs against your positions, but many traders do it. Developing your own custom indicators might make the transition easier giving you more power over your trading account. Taking steps to improve your trading starts with technical analysis.


Learn how to master day trading by downloading two of Trading EveryDay's FREE products: Tools of the Trade eBook and a Trading Plan Planner. Dedicated to helping people become profitable traders, Leroy Rushing, a professional day trader, trading coach, and author, is the CEO of Trading EveryDay, a distinguished provider of educational trading products and services.

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