By Chris Zielinski Life is complicated. Every day we deal with ups and downs, ins and outs, the good and the bad. We have families, friends, education, bills, homes, jobs, dreams and aspirations to consider on a daily basis. For many people, even something as simple as driving to work in the morning can be complicated by a traffic accident that backs up the highway. These types of complications can throw off our entire day and put us both behind schedule and in a bad mood. Considering the number of complications inherent in everyday life for the average person, it’s a wonder that anyone would want to take on something as complicated as day trading stocks.
The stock market is a giant, convoluted mess of propaganda, truth, lies, and seemingly inexplicable behavior. The old philosophy of buy and hold is now complicated by a market that not only depends on a constant stream of news, but also consistently overreacts to bad news and remains skeptical of good news. Further, swing trading stocks is complicated by the existence of algorithmic trading applications and the integration of social media into the fabric of an already complicated system, as evidenced by occurrences like the recent AP Twitter hack that sent the entire market plunging nearly 2% in the span of only six seconds. Day trading, then, can only be assumed to be equally as complicated as all the other styles of trading and investing, if not more-so.
Given the number of unavoidable complications that already exist when learning to trade stocks, I am consistently amazed by the tendency of traders to clutter up their charts with too many indicators and measures. I see charts that are so crowded with money flow indices, Donchian channels, derivative oscillators, pivot points and regression lines that I can barely make out the price pattern. I mean, really … there is an indicator called Williams’ Alligator that uses fractal geometry and non-linear dynamics to determine where price could potentially go based on whether the “alligator” is “sleeping” or “hungry.” No, I’m not joking.
So let us simplify things for once in our lives. Do yourself a favor and eliminate all indicators from your charts and start over, only adding what you really need. Remember that every indicator must be calculated from some underlying value – usually either price or volume – and that traders were just as active in the market before computers ever existed to calculate and draw all these indicators. I speak from first-hand, personal experience when I say, especially if you are a new trader, do not clutter your charts up with indicators that you don’t need. For most purposes, you don’t need anything more than price, volume, and a couple of moving averages. I know one trader who consistently makes $2000-$3000 per day and uses zero indicators. Just volume and price. That’s it. If that trader can do it, so can you.
Technical analysis is largely a self-fulfilling prophecy. Thus, barring unforeseen circumstances like the inevitable press release or earnings announcement, it is really only important to be aware of the price levels that the majority of market participants are aware of as it is usually when these price levels are violated that the largest price movements occur. For this reason I recommend using different indicators on different charts, and tailoring the indicators to the timeframes the charts cover. On a daily chart, for example, it is likely that the most common indicators in use are the 20-day, 50-day, and 200-day moving averages. The majority of market participants are also likely watching stochastics on this timeframe. Contrastingly, it is unlikely that the vast majority of market participants are watching the Coppock Curve, the Elder Ray Bear Power indicator or the Klinger Volume Oscillator Histogram. So, get rid of them. You don’t need them and they are overcomplicating your already complicated life.
On an intraday chart for day trading, once again we need to keep it simple. Do you really need a 200-period moving average on a five minute chart? Well, that depends on whether or not you care what price was doing 200 periods (1,000 minutes, or 16.67 hours) ago on a five minute chart. Most traders I know that are trading on a five, two or one minute timeframe are holding their trades for no longer than a few hours at most, and thus do not care what the price was doing 17 hours ago, but rather what it was doing 30 minutes ago or perhaps at the beginning of the day. On this timeframe, perhaps a 20- or 9-period moving average is a better indicator as it is more likely that the majority of market participants are watching the prices at those levels. All other uncommon indicators should be eliminated.
Of course, every trader is different. I use indicators that I believe work best for me, and you must use the indicators that you believe work best for you. However, remember that all indicators must be calculated from something. The only indicator that truly tells you what has happened, and thus what may happen in the future, is price history itself. Almost every other indicator in existence is calculated from price or at the very least uses price as a component of the calculation. Consequently, it is largely a detriment to your trading to clutter up your charts with so many lines and indicators that you can no longer accurately interpret the pattern of price itself. The old K.I.S.S. (keep it simple stupid) design principle developed by the US Navy in 1960 has never been more true than in the complicated world of day trading stocks. Do not complicate your life more than it already is. Through eliminating unnecessary indicators, simplify your trading and simplify your life.
Meet Chris Zielinski: Chris grew up in a small town in upstate NY called Ballston Spa. After graduating from high school, he achieved an Associates degree in Computer Information Systems from a local community college and then went on to achieve a Bachelors in Management Information Systems from the Rochester Institute of Technology in Rochester, NY. Chris worked as a systems administrator in Rochester before moving to Charleston, SC in 2011. Chris is a senior systems engineer for the US Department of Defense in Charleston, and in his free time is working to become a full time day trader. Documenting that journey, he runs a blog www.chroniclesofadaytrader.com to collect his thoughts on day trading, help other new traders and detail his strategies. His goal is to leave his job and be day trading full time by the end of 2013 or early 2014.
Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of his employer or any other person or entity.