Indicators: Pros and Cons
Pros and Cons of Using Indicators to Trade the Options
I guess every trader trading binary options and studying already existing trading strategies drew attention to the fact that they can be divided into two types:
- indicator trading strategies;
- trading strategies without the indicators.
Let's start with the fact that the use of indicators to trade on the stock exchange started with the invention of trading. At the time, of course, there wasn’t such a variety of technical applications as it is today.
What gave rise to the popularity of the indicators?
Indicators in the financial market have an important role in the technical analysis. Today, there are many software applications that are classically divided into several groups:
- trend indicators;
- Bill Williams’ indicators.
- custom’s indicators.
Thus, the trend indicator MACD in its algorithm processes the information of the two moving averages with periods (i.e., the number of evaluated history bars) 12 and 26, and builds a histogram, by which one can predict the turning points of the trend and local trend change.
hh Stochastic Oscillator gives us information about the prices in overbought and oversold areas, as well as about the quotations tools in the local correction and changing of the trends.
hh The indicator Moving Average provides the information about the general direction of price quotations based on the number of bars in history taken for analysis.
hh At the same time if the trader applies several types of technical indicators at the same time, he will receive very valuable information that will most likely predict the further price movement. Don’t forget that the basic strategy of earning on the binary options is the fact that a trader needs to predict the future direction of prices correctly.
On the screen below there are examples of trading strategies and tactics for binary options with indicators.
hh 6 All the strategies featured on the screen can be found in the section trading strategies on our website.
What causes the rejection of indicators by many traders?
There is a pretty impressive group of traders who believe the price of the instrument as the earliest and most important technical indicator that shows the current trend in real time, rather than in the interpretation of the history of quotations for future periods. Thus, the value of all the indicators is neglected. As a matter of fact, the technical indicators just give the evaluation of quotes history trying to predict the future direction of prices. However, according to opponents of indicators assessing the history to predict the future is ineffective, since the price itself without any indicator is capable of showing the direction of its movement. Trading without indicators is called PriceAction - trade on clear graphs based on the evaluation of the price behavior.
hh In addition, there are a number of trading strategies (for example - the mathematical strategy) where the use of indicators is not advisable, since trade is conducted on a completely different techniques and tactics.
Let’s underline all the pros and cons of the indicators in trading strategies and tactics of binary options trading:
- a great amount of indicators to help; you can perform technical analysis to identify trends and price movements;
- 100% formalization of trading signals for binary options, since the signals cannot be interpreted as two-digit display;
- trade on the indicator strategies can novice traders who still lack sufficient knowledge of other more complex forms of trading.
- constant lag of the indicators, and therefore, the late entrance to the trading positions by the trader;
- indicators often do not show the actual changes in the market and trading system can be ineffective.
- trade on a clean chart allows you to not be distracted by the testimony of lagging indicators, and follow the price, which is the best indicator to trade;
- lack of a clear formalization of conditions for entry into the market, which is confusing and interpreted ambiguously.
To sum up, it can be concluded that all the disadvantages in the use of indicators in trading become pros in the strategy without the indicators, and the question of all the "pros and cons" in the application of such technical devices is really a matter of taste for each trader, as well as other approaches to trade that can help to increase the trading deposit.