Patience - the main virtue

Funny that one tends to plunge in a transaction in a hurry and then
wait for ages for it to mature. I have noticed that the signal takes a
long time to mature and gives enough hints of its taking shape. There
is no need to rush in. Wait for the signal to happen, it some times
takes days to do so. Then get  in and the maturing happens that much
faster.

So it is really a question of sitting on sidelines for long and in the
transaction for lesser time versus
the other way!

Take your pick!!

Handling almost right setups

There are times when you get near all right setups. It happens to me
many times, particularly when I am looking for a signal, some how,
now. That needs to be avoided. But there are times when an on the face
of it good looking signal later reveals it was not so good after all,
when it fails. It particularly happens at the shorter time frames.
In shorter time frames the noise levels seem to clutter one's clarity
of thought and the eye starts deceiving. So when such setups are
traded and they fail then what?

Best is to take the loss as it happens, if one is wrong one is wrong.
That loss will be smallest loss than if one had held on.

Other option of course is to stay away from short term trends!

If it was easy to avoid that temptation!!

Anticipation vs. Happening

Einstein is said to have said :

we see what we want to see and not what 'is'.

Many times i have made the mistake of anticipating a signal. Only to be
stopped out again and again. Funny thing is my anticipation is not bad - it
does happen that way in a day or two. But by the time one gets tired of
being proved wrong so when it really happens one is sitting out of the
market!

So it is preferable on the whole to not anticipate but to react.

Failure of a signal - Impact

Some times a signal, that you have been using fails. Does it mean that the trend is changing?

There are times when on a failure, there is an immediate feeling that one must ride the market the other way. It also happens due to the mental need to compensate for the loss incurred on the signal failure.

Though occasionally  the market may indeed go the other way, it is always better to re-look at the market on the signal failure.  Forget the loss incurred and think of the decision as if it is a new transaction that you were to decide on.

This is essential as many times the failure is only an advance warning of a trend change and it may be quite some time before the change does occur.

So a signal failure can be taken as an advance warning and one may reduce the size of positions till a final confirmation is in place.

As Ayn Rand said some where - negation of a negative is not necessarily  a  '+'.

Using overbought/oversold indicators - II

One of the reasons why transactions based on these indicators can not
be taken against the trend, being that these indicators can remain in
the extreme region for a long time along the trend. Many a traders,
including yours truly, have tried to take these extremes and trade
against the trend to our grief.

So never use these indicators against the trend, unless you have
reasons to believe the market is in a range. For range trading these
indicators may be used both ways.

But of course when is the market in a range? and by the time we
realize so may be it is time that the range is broken and a new trend
starts?

So always take the signals of these and any other indicators with a
pinch of salt and do, please DO provide special attention to the
prices itself. After all prices are the primary data and indicators
are derivatives.

And we all have seen how derivative trading can land the bigg
operators also in a soup.

Using overbought/oversold indicators

One way of trading is using the indicators such as RSI, Stochasitcs etc.
When these indicators move between 70/80 - 100 markets are thought to be overbought.
When these indicators move between 30/20- 0 markets are thought to be oversold.

You can get some idea about the indicators here.

Not many books may tell you that the indicators are to be used only in the direction of the main trend.

e.g. In a daily uptrend, only take signals of RSI in the oversold region to buy and vice versa.

There are many more nuances to this but about that some other time!

How to keep it simple? Some indicators to look for

We shall try to go through a few methods of trading by using simple measures like moving averages, overbought / oversold indicators and their divergences with price etc.

Let us look at moving averages to start with.

To know more about moving averages you may see this:

Moving averages as you may see come in various flavors, simple, weighted, exponential etc.

I have been using exponential moving averages as they seem to fit my mentality, I like a signal a little earlier than the simple averages.

You may try some of the methods listed in the link above to see what suit your temperament and the markets that you trade in.

What needs to be remembered is the moving average crossovers happen after prices move substantially. If it is a failed signal (due to higher/ lower time frame deciding against it) the losses will be wider.

So the simple tool can result in simple profits or simple loss!!

Anyway it is easier to digest simple loss than complex analysis driven loss- because by that  time your brain would have gone mad with the analysis, and then top it up with a loss; you will be madder. Few occasions like that and you will be senile.

So let us use simple methods and keep our sanity if not our money.