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How to Get More with Less Indicators
03/26/2012 2:00 pm EST
Using multiple indicators just increases the odds for mixed signals, says Anne-Marie Baiynd, who advocates a process called "synthesis," which is designed to maximize indicator effectiveness.
Synthesizing your information. We’re here with Anne-Marie Baiynd, and she’s going to explain to us how you can use “synthesize” your trading tools to create a good trading strategy.
That is the key to creating a trading strategy. A trading strategy isn’t really a collection of technical indicators. It’s a small group of indicators that complement each other.
So when you’re building something like that to help you trade, less is usually more because what you want to do is have a number of indicators that will agree together or disagree together. The more indicators you have, the more likely it is that some of them will disagree with each other.
That’s very, very key in terms of building a strategy in the first place. The problem is, with synthesis, we really have to decide how we’re going to choose what indicators we have.
Really, that has a lot to do with how you trade. If you like esoteric indicators, things that are very different and new, you can use those, nothing wrong with that, just have one indicator that everybody uses on there and let your indicators that you like complement those things.
I think it’s hard for folks to choose because they feel like they’re losing something. In reality, you do lose something, but what you gain is a more streamlined decision-making process, and that’s worth much, much more than the information you might lose.
Sure, so what you’re saying is default to clarity. Find things that agree with each other because, although intellectually, perhaps it might be interesting to see all these different things that are happening, or one (indicator) says buy and one says sell, you want to find a group that collectively will point you in one proper direction.
That’s exactly right. And it’s interesting that you use the word “intellectually.” A lot of us look at the charts in some sort of intellectual endeavor. We know that to understand them completely, you really do have to have a little bit on the ball. So we begin to look at it as an intellectual pursuit, but it really is not.
There is something very utilitarian about how it is that you choose. In the end, we trade in the market—or at least I trade in the market—to make money. I don’t trade it for fun, even though sometimes it is fun.
What we have a tendency to do is put too much of an intellectual focus on what this means and what that means. For me, I have a very simple method that I use, and it’s “Is this going to help me trade better?” And if the answer is yes, I keep it; if not, I kick it to the curb.