How can you reliably evaluate technical indicators and charting methods?

1 Define your purpose

Before you start using any technical indicator or charting method, you need to define your purpose and strategy. What are you trying to achieve with your analysis? Are you looking for entry and exit signals, trend confirmation, risk management, or market timing? How long do you plan to hold your positions? Are you a day trader, a swing trader, or a long-term investor? Different indicators and methods have different purposes, assumptions, and limitations. For example, moving averages are useful for identifying trends and support and resistance levels, but they can lag behind the current price and generate false signals in choppy markets. On the other hand, oscillators like RSI and MACD can help you spot overbought and oversold conditions and potential trend reversals, but they can also remain in extreme levels for a long time and give misleading signals in strong trends. Therefore, you need to choose the indicators and methods that match your purpose and strategy.

3 Customize and combine

Another way to evaluate technical indicators and charting methods is to customize and combine them according to your preferences and needs. Most indicators and methods have parameters that you can adjust to suit your time frame, risk tolerance, and market conditions. For example, you can change the length of the moving average, the period of the oscillator, or the settings of the charting method to make them more responsive or smooth. You can also combine different indicators and methods to complement each other and confirm your analysis. For example, you can use trend indicators with oscillators, volume indicators with chart patterns, or candlestick patterns with Fibonacci retracements. However, you should avoid overloading your charts with too many indicators and methods that can confuse or contradict your analysis. You should also avoid curve-fitting your indicators and methods to fit the past data, as this can reduce their predictive power and robustness.

4 Review and update

Finally, you should review and update your technical indicators and charting methods regularly to ensure that they are still relevant and effective for your analysis. Markets are dynamic and constantly changing, and so are the indicators and methods that reflect them. You should monitor the performance and signals of your indicators and methods and compare them with the actual price movements and outcomes. You should also be aware of the limitations and drawbacks of your indicators and methods and how they can affect your analysis. For example, you should know that technical indicators and methods are based on historical data and mathematical formulas, and they cannot capture all the factors and events that influence the market. You should also know that technical indicators and methods are not infallible and they can generate false, late, or ambiguous signals. Therefore, you should review and update your indicators and methods periodically and adapt them to the changing market conditions and your evolving goals.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?