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Hi guys, hi from Andrea Unger, let’s talk about indicators.

I’m often asked what indicators I use in my trading systems, or another question is: “If you had to choose one indicator, which one would you choose?”.

Well I don’t use indicators.

Actually I don’t use indicators in my trading systems as a setup, as a decision maker.

I mean, I never use indicators to mix information together in order to get a level and a timing to enter the markets.

Why not?

Because I’ve never found an effective solution to this approach, I’ve never found a way to get a decent performance report using indicators to define where and when to enter.

Also I believe that indicators first of all “indicate”, they give us an idea of what is happening okay, but they’re not detailing the information, they are an average value of different situation, also in case I would use indicators or if you really want to use them I suggest to consider using indicators only if you have wide enough timeframes on your chart which means at least above 30 minutes time frame.

Why?

Because indicators are built out of a price in your bars let’s say, and the noise in the markets affect the information of indicator if it has too high an incidence on the data, if you work on extreme case one-minute bars, obviously, and you build the indicator on the close of the bar, the position of the close inside the range of the one-minute bar, can have a great difference in percentage on the range.

If you move it by one, two or three ticks and obviously the exact position of the close of the minute you are plotting the chart is random, it can be here, it can be one tick above, two ticks above one tick below.

We cannot obviously determine exactly which tick is the right one, but if we move like one, two, three ticks and we compare that to the range of the one minute, that move can be important in percentage.

On the contrary if we work on one hour bar, sixty minutes bars, this is perfect, the range of the bar, and we move one, two, three ticks, it actually does not really matter too much on the whole information we get.

So building indicators on the close of the bar, but the same applies if you use the high, the low, the open or whatever, obviously can lead to dramatic changes if this close can be affected by randomness of prices of that noise itself.

So actually if you want to use an indicator and you have a clean information out of what you have plotted, you need to use a larger timeframe, this is my personal opinion but I found obviously data from my research that confirm it is better to work on large timeframes when you want to use indicators.

That said, I don’t use indicators as a set up or trigger tool, I eventually use some indicators as filters. I prefer to enter based on patterns and on breakout or counter trend, concepts of very basic levels, higher of yesterday for example, higher of today these things.

Then I can add an indicator to filter.

My favorite indicator of these is the ADX.

I avoid for example entering and drag out when the value of ADX is too high. Too high is already above 40 for example, because a high value of ADX indicates that there has been already a pretty strong acceleration the moves of the prices and normally I found out that the response to a breakout after an already existing acceleration is weaker if not, at least, not effective at all.

So I prefer to enter at breakout when the situation has been calm enough before the breakout happens which means ADX should have lower values.

Personally I normally use below 40 but this is up to you and your tests eventually.

Another way i use indicators sometimes is using moving averages but these are simply used as a trend indicator which means I go long all if we are above this moving average and short only we are below for example.

Getting back to the ADX, there are some benefits, similar benefits using some oscillators like the RSI, somebody prefers to use RSI instead of ADX.

I don’t use it, I don’t… I’ve not noticed any particular benefit but it might be a solution.

But that said, this is the only way I eventually use some of these instruments.

No setup, no trigger based on indicators in my personal trading.

Only eventually filters end if I use them, I do use them on large timeframes, I never plot indicators on a five-minute chart because I think it is too poor as information, what I’m getting from that because of the errors present in the plot of the indicator due to the noise in the markets of the smaller timeframes.

Filters, no setup, larger timeframes if you really want to use it.

This is all I would like to tell you today about indicators, obviously if your have question you can write below my video or send me some specific topics to answer.

I’m here, I hope it was useful, in any case see you next time ciao from Andrea Unger

 

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Andrea Unger

Known as the only 4-Time Trading World Champion (2008, 2009, 2010, and 2012), Andrea Unger is a full-time professional trader since 2001 and honorary member of SIAT (Italian Society of Technical Analysis, a branch of IFTA). Appreciated author, he is often invited as a speaker all around the world.

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