06. Indicators & Alerts

Reading this page: Take a good 10 minutes and re-read until you get it.
Time saved on irrelevant indicators: A lot!

We’re going to make a very bold statement now. It is the ethos of this website, our trading methods and, we believe, will change the way you look at trading charts and indicators permanently…

Do not trade using lagging indicators

Now, if you strongly disagree with this statement (which of course is just our opinion among infinite others) then we wish you well with your methods and recommend that they are infinitely well covered elsewhere. We are simply not here to discuss indicators on this website that average price over many bars – and for good reasons.

We do not use: Moving Averages, Stochastics, RSI, Momentum, Parabolic SAR, CCI, MACD, Ichimoku or anything else that uses averages of past prices to enter and exit trades.

The simple reason is that, although they may give you a slight edge, the edge is not statistically significant enough to be taken advantage of unless you have an entire portfolio of many automated trading algorithms and an account large enough to have such a portfolio. Even then, the edge is likely going to only give you a similar return to a good investment fund or savings account over a long period of time.

These wavy line averaging indicators might look meaningful – in the same way that a stopped clock is right twice a day – but really they are just distractions that brokers taking the other side of your trades are happy to supply you with, on their platforms, to keep you amused and steadily give them money.

OK, maybe with the exception of bollinger bands

The only exception we make is Bollinger Bands, but they are only really relevant for scalping traders on the 1 minute chart, and for good mathematical reasons, but they are still just an aid to price-action analysis and certainly no holy grail indicator. They do work but are not really going to help the private trader unless you have direct market access.

We do, however, have a good Bollinger Band indicator setup that we’re happy to provide and explain in the MetaTrader Indicators and Templates section in case it suits your style.

We trade using the price-action of the last bar on any timeframe

The reason for this is that it gives you information as close to the future as is possible without having supernatural foresight. So make sure you read up on your candle patterns on Baby Pips, they are possibly the best indicator for what’s happening, as close as possible to the latest price-action.

This is the reason that you won’t see professional traders with any wavy lines on their charts – just nice clean bar/candle charts with a few important lines on them – for which we’ve also included a couple of chart templates so you can quickly clean up your charts.

Support & Resistance Levels

There are many ways to explain the behaviour of markets by psychologists – talking about fear and greed, pleasure from winning and pain from losing – but most of these people turn to write books, instead of actually making money trading.

Trading is a technical process based on the free-market forces of supply and demand – finding a price for each second of the day through price discovery. This essentially means that price movements will continually test previous market highs and lows to confirm whether they are the outer limits of the next price movement or not.

It is these price highs and lows that are the only factual indicator of where price limits were previously exhausted and therefore the perfect place to discover whether current movements will either continue or reverse.

To visually analyse these levels we draw support and resistance lines on our charts and then trade based upon how price behaves when it reaches them.

Drawing support and resistance lines is an important process for all traders and investors to learn – you simply mark your charts with the most desirable trade entry levels and sensible stop loss and profit target levels, and then see how price reacts to these levels before deciding on the direction of your trade.

Simply put you want to take trades as close to strong levels as possible; place your profit targets inside the next significant level; and your stop loss outside a very strong level in the opposite direction – because if price charges through it then your directional bias is wrong and you need to get out and re-assess (or sometimes reverse) your trades.

It is well worth learning to draw these levels yourself but we’ve created some very handy indicators that can automate this process for you – helping you speed up your chart setup and analysis and concentrate on looking for the very best trades.

Vital statistics – spread and average trading range

We also need to keep an eye on the spread costs involved of the markets we trade – so we  designed a neat little indicator to enhance our MetaTrader charts with a little extra text information in the top left corner below the standard text.

Plus we do use the Average Trading Range (ATR) of each market so that we can gauge the current volatility compared to recent volatility, simply as a guideline for realistic profit target movements and save stop loss levels. There’s no point expecting to make twice the typical Daily ATR in a day – that would be improbable – we prefer to work within the boundaries of probability.

Very handy alerts

Of course, depending on your trading timeframe, it is not always possible – or to be fair, much fun – to watch charts all day.

But thanks to the wonders of computing and modern chart software there are ways to have pop-up alerts, emails and text messages when the price of an instrument you are monitoring for a trade setup approaches a level that you are interested in trading into or out of.

Many web based broker charts have these facilities, including IG Index, and of course, thanks to your helpful MetaTrader programming friends it is also possible to have these alerts generated from MetaTrader Indicators and EAs.

If you want to trade time efficiently and safely, we recommend that serious traders will benefit greatly from setting up these automated alerts. They will remind you when you do need to look at your charts when you might otherwise be distracted, have lost track of time, or simply want to monitor more instruments than is humanly possible without the brain of a computer and no life outside of trading.

There is one other simple alert that we also recommend you setup and this can be done very easily using any computer calendar software or sometimes a specific plugin for your operating system. This is a time based alert that gives you a bleep or pop-up message every Month/Week/Day/Hour/5 Minutes depending on your trading timeframe (so at each bar/candle close).

All you do is set your computer (or phone/watch/clock) calendar to give you a repeating alert to check your charts at the close of every candle on the timeframe and during the hours that suits you.

If you’re a long term investor you will want a reminder to check the charts at the end of each Month or Week.

Position Traders will want to check the charts between 10pm and 11pm GMT/BST each day to see how the previous day’s candle closed.

Day Traders will want to have an alert or bleep on the hour, every hour while they are at their computer.

Scalpers might want to do the same but every 5 minutes as good discipline to avoid getting drawn in or shaken out of trades too early in a bar’s formation.

If you’re trading on the 1 minute chart you can probably do without this, although though but do take a break every now and again!

There you go – we’re getting somewhere – now you should be starting to see how to get yourself prepared and building your professional setup with all the computer aids you can to be time efficient and methodical in your trading is going to make you a much smarter and more efficient trader.