INDICATOR FASCINATION
The first assumption that our trader makes is that someone out there must know
how to do this. There must be an expert, someone who knows how to make
money, that has created the magic indicator to do it. This is the Holy Grail
syndrome and our trader now embarks on a search for the Holy Grail Indicator.
He knows intuitively that there must be an indicator that will give him the
information he needs to make profitable trades…that there must be teachers out
there that know how to make money trading. He thinks, “All I need to do is find
him and his indicators.”
This is the indicator fascination phase. How are indicators calculated, what do
they represent, and are they the “secret” to making money? All of these questions
need to be answered so he becomes a seminar junkie, travelling the country on
the quest for that great technique, the one that everyone uses to make the big
money. He visits Chicago one month…L.A. the next…followed by a visit to the
Chicago Mercantile Exchange. He watches the CNBC expert technicians and
surfs the net looking for that magic indicator.
Now he’ll only buy when the ADX is moving up and the MACD is positive, and
he’ll sell only when the RSI gets overbought and turns down. His trading becomes
more indicator-based and he listens less to his broker. For example, he may tell
his broker, “No, I won’t buy Apple Computer until the Earnings Momentum
Indicator is over 80!” Unfortunately, even with all of this information, and all the
assurances of his seminar leaders, he still is not making money. He even begins to
wonder if he will be able to continue trading with all of these losses. He thinks,
“If I could only control the losses, I will probably be able to trade a little longer before my money runs out.”
It is at this stage that he learns the value of stop losses, known as
stops. He learns the importance of managing the risk on each trade. He gets a hint that there is more to trading than just the indicator, and his ears perk up when people mention the concept of controlling risk and conserving capital. He thinks, “I just want to stay in the game, to keep enough money to make the next trade. I don’t want to quit a loser!”
But even with the newly found indicators, and controlling his risk with stops, he
continues to lose money, although he also consummates some winning trades that
keep his capital from depleting too quickly. And here he has another major
revelation—markets can be trending or choppy. It is at this point that he realizes,
“If I could only predict the choppy markets, where I lose most of my money, I
could simply stay out of the market and get back in when it starts to make the big
move.” So he starts another quest, that of leaning how to predict choppy markets.