In a recent post I discussed a new indicator that I have built to identify pullbacks. Recently I was asked if I was trading the indicator. Absolutely not!
I use indicators for two purposes - firstly to identify specific criteria that are part of my trading plan, or a trade setup that I am testing. For example, I have an indicator that identifies swing high and swing low fractal bars. Using the indicator allows me to adjust the detailed criteria that define these price patterns so that I can speed up back-testing.
Secondly I use indicators as a measure of momentum, or more correctly, changes in momentum. This is easiest to understand using an analogy with physics. If an object is moving it has 3 characteristics: position, velocity and acceleration. I use price charts to assess position, price charts plus moving averages to assess velocity, and indicators to assess acceleration.
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