In my trading my primary focus is on the chart itself, support and resistance on the chart, and the chart price action. My primary indicator is always volume, and volume analysis. So I think it would be safe to say that I am not a system trader, and with good reason. The stock market and the futures markets are ever evolving and go through a variety of price patterns. Sometimes the price patterns are well-suited for systems type trading, and other times systems trading is woefully inadequate. By observing several different factors on the chart I am trading I can make some determinations about how I plan to trade during that particular trading session. Some of the factors I consider are:
Is the market in a consolidation mode, or a channel?
Are the price breakouts successful? Or do the price breakouts fail?
Is the price action confined solely to the channel? Or is the price action outside the channel?
Is the market trending in a straight line?
Is the market trending with periodic retracements?
By observing the price movement on my daily chart I can make determinations about all these questions. Further, during the morning session the market may exhibit certain price behaviors and then in the afternoon session exhibit different price behaviors. As a trader, it is essential that you adjust your thinking as the market changes in personality. The characteristics I enumerated above are but a few of the many nuances the market displays throughout the course of the year, and it is my opinion that the best system is to observe market behavior and gauge your trading activity accordingly.
I am particularly fond of trading breakouts and breakdowns in the market because they are often very profitable and made indicate the beginning of a longer-term trend, which I can trade very effectively. However, there are many days that the market will begin a breakout or breakdown and then fail. After a couple of these failed breakouts, I can come to the conclusion that trading in a style that is meant to take advantage of breakouts and breakdowns is not going to be in any effective strategy. Further, I will also conclude that most of the price action is going to be within a defined range and can utilize a set of strategies that best utilizes techniques for range bound trading.
Indicators use information generated through past price action. Some of the time periods examined may be as short as five one minute periods, or as long as 200 ten minute periods. The key component and most important concept when utilizing indicators is that they lag the market. There are some indicators that claim to be forward-looking in nature, or leading indicators. I have used these indicators extensively and found them to be of limited value as leading indicators. After all, they use historical information in their algorithms and invariably lag the market, no matter how they are billed.
My point is a simple one; your best information will come from the chart and price action itself and indicators are an excellent way to reinforce the ideas or formulations that you have developed about the market behavior. On the other hand, straight indicator trading is a tough way to make a living and I have watched many traders fail because they relied on indicators as primary information sources and instead of the chart in front of them.
In summary, I have pointed out that the market is a creature of many moods and your intellectual abilities are the most effective method to ascertain the day the behavior of both the stock and futures markets. I have discouraged traders from using indicators as a primary tool to initiate trades or identified trade setups; instead, I have presented the idea that indicators are an excellent way to reinforce market action and trade setups you glean from chart reading.