Technical Indicators – to use, or not to use, that is the question

There are so many Technical Indicators...

There are so many indicators but why? Which one is useful and which one is not? Which one is the best one and how many should I use? Can I use all of them at the same time? What can they tell me? These are the most common questions about indicators.

Instead of writing detailed technical description about them I am writing about it from my point of view.

What Technical Indicators do in my system?

Indicators give you signals. They can be preliminary, confirmative or partly. I very, very rarely use them just by it selves. I always try to combine them with other Technical Analyst elements to increase its’ reliability. When I use more than one indicator I use those which complement each other.
For example if I use EMA’s which are trend following (lagging) indicators, they give me confirmative lagging signals, I combine them with a momentum based indicator such as CCI (Commodity Channel Index). Momentum indicators can be used in sideways period and strictly forbidden to use in strong trend; lagging indicators are opposite to it: they can be used in trend and not to use in sideways (as they provide many false signals). You do not want to use 2-3 indicators which give you the same answer to your problem, do you?
If you know how they work and what kind of signals they can provide, you can setup your system easily.
On the other hand you should be careful with them because most of them have a variable factor: Indicators’ period. You can change their period (number of bars they calculated on) and they will give you different signals at different time or at different price level. You have to make their modification carefully and according to your timeframe and your strategy.
E.g. for using SMA’s or EMA’s the most common settings are the following:
EMA20 – 20 trading days = 1 month
EMA60 – 60 trading days = 3 months
EMA200- one tax year

Generally speaking the longer timeframe you work on the longer period you can use. Don’t use EMA200 on 5mins chart with your scalp strategy as it doesn’t make sense at all.

Ok, it's enough! Which ones do I use in my strategies?

Volume indicator (volume is the most important feature over the price; I always, I mean every given day I use it for shares; not to FOREX as it is a bank secret)
Bollinger Band (most of the time I use it, very powerful and “talkative” indicator)
MACD (lagging a little bit but very reliable signals)
EMA, SMA (lagging, but good signals if you use correct period settings)
RSI (momentum indicator, very powerful on shares)
CCI (one of my favourite ones; momentum indicator with very reliable signals on FOREX)
Fibonacci studies (for determining the end of correction or Take Profit levels. Very accurate and easy to use – 38.2%, 50%, 68.2%, 100% - these are my trusted ones.)
Pivot Points – on FOREX intraday charts. Give us reliable signals on a few currency pairs – you have to test them before use it!
Parabolic SAR – easy to use system for determining Stop Loss levels (with correct settings – can be vary by currency pairs)

Anyway, whatever indicators you use read as many information about them as you can. Always try to find the original description and sourse of them (written by its' inventor).
Don’t use more than 3-4 indicators on the same chart as they will confuse you. Stick to the simple indicators; some new, fancy ones look fantastic and colorful, but these are not required features for Technical Indicators.
Bollinger Bands, Volume, MACD, SMA’s are the most common used ones and there's no wonder. They have been providing the most reliable signals for more than 30 years for many Traders. I ‘ve never seen any serious Analyst without them...

Next time I'm going to write about the motivation.