Trading Proverb #2, Tools

Trading Proverb #2. Do not force an indicator to work just because you want it to work.

For instance, let's look at your standard MACD setting of 12/26/9. First of all, do you even know what those settings are measuring? Is your trading plan designed to trade when the 12 moving average crosses the 26 moving average? That is what a 0 line cross would signal. This setting is so screwed up they have invented a whole new indicator to measure what they call divergence, lol, which means the MACD has stopped functioning properly and we are going to use that as a signal somehow. Okay, whatever. When the MACD goes into "divergence", it means it has signaled a change in direction, but the price is not reacting to the signal. The MACD says sell, but price keeps going up. The MACD says buy, but price keeps going down. The really cool, or incredibly bad thing concerning divergence is that it is an after-the-fact observation. Like so many gurus like to do, they will show you historical charts and show you divergence and how you "COULD" have profited. Hocus pocus. It does you very little good when it is actually happening. So, why would you use a broken indicator setting? I have no idea. Do you?

You could use more appropriate settings and then the MACD signals actually work. Try the moving averages you are actually monitoring.

The MACD is just one example. You probably have others. If it is broken, fix it, or delete it.

Here is how your brain will see it. You get a signal from some other indicator that says to close the trade. You bad indicator does not agree. So, you stay in the trade and watch as pips disappear from your profit.

Or, you enter and the trade is struggling to move your way. Your good indicators are telling you to exit and reverse your position, but you search for any indicator that tells you to marry your trade. The bad indicator is now the place where your eyes become glued and you don't even notice all the pips you are giving to me.

This leads to emotional trading because your subconscious is not stupid. It knows something is not right, so it creates anxiety and sends signals to your brain that you must take profit now, or hold onto the loss because it will turn around. So, you ignore the math, and instead you rely on feelings of fright or greed. It can all be avoided by simply taking out the garbage.