Adding Technical Indicators to your trading system. A checklist

For traders, the motivation to explore additional technical indicators often stems from a desire to enhance trading results and refine their existing system. With the abundance of information available about technical indicators, it can be tempting to incorporate new tools into your strategy.

However, as the decision-maker in your trading journey, it is crucial to approach this process with a structured mindset. The first step is to ask yourself a fundamental question: “Is it the right time to explore the use of another indicator?”

This article outlines four critical questions you should consider before introducing new technical indicators into your trading system.

1) Am I Fully Actioning my Existing System?

The primary motivation for adding a new indicator is often to improve the results of your current trading system. However, such improvements can only be measured if you have a well-defined system and are consistently trading it as designed. A comprehensive system should at least include rules for entry, exit, and position sizing.

Key Considerations:

• Are you faithfully following your current trading plan?
• Are you journaling your trades to track adherence and outcomes?

For many traders, the root issue lies in either an incomplete system or inconsistent execution. Honest self-assessment, backed by evidence from a trading journal, will help identify gaps in your current approach. Addressing these gaps should be your priority before adding another layer of complexity with a new indicator.

Action Steps:

• Review your trading journal to ensure you are consistently following your existing plan.
• Focus on refining your discipline and execution rather than prematurely seeking additional tools.

2) Is Adding Another Indicator the Most Impactful Change I Can Make Right Now to my trading?

Improving your trading outcomes involves prioritizing actions that offer the highest potential for positive change. While adding an indicator may seem appealing, there are other critical areas to address first:

• Trading Plan and Discipline: Ensure your existing plan is robust and that you are adhering to it consistently.
• Journaling: Regularly document your trades to provide a foundation for evaluating performance.
• Knowledge Development: Deepen your understanding of the indicators you already use. Recognize what they reveal about market conditions and their limitations.

Expanding your knowledge not only helps you maximize the effectiveness of your current tools but also enables you to make informed decisions about integrating new ones. In many cases, these priorities may outweigh the benefits of adding another indicator at this stage.

Action Steps:

• Evaluate whether enhancing your plan, discipline, or learning offers more immediate value than exploring new indicators.
• Commit time to mastering your existing tools before seeking additional complexity.

3) Do I Have Clarity on What any New Indicator Should Achieve?

Before introducing a new indicator, you must clearly define its intended purpose. Start by identifying whether your focus is on improving entries, exits, or another specific aspect of your trading system. Once you’ve pinpointed the objective, consider whether adjustments to your current indicators might achieve the same goal.

Example: If you use a 10-period EMA as an exit signal but find it too sensitive to market noise, you could test a simple adjustment, such as switching to a 20-period EMA, before adding a new indicator.

Action Steps:

• Identify the specific gap in your system that a new indicator would address.
• Evaluate whether tweaking the parameters of your current tools could achieve the desired improvement.
• Test adjustments thoroughly before implementation.

4) Do I Have a Formal Testing Process in place for an evaluation of a New Indicator?

Introducing a new indicator requires a structured testing process to evaluate its impact on your trading outcomes. This process ensures that any changes to your system are based on evidence, not speculation.

Testing Framework:

1. Back-Test: Analyze past trades to determine how the new indicator would have influenced outcomes. The goal is to justify the need for a forward test.
2. Forward Test: Use a demo account to test the indicator in real-time market conditions. Maintain all other aspects of your trading plan to isolate the indicator’s impact.
3. Trading Plan Integration: If testing yields positive results, document how the indicator will be used within your trading plan. Be specific about its role and under what conditions it will be applied.
4. Review Period: Set a timeline (e.g., three months) to assess the indicator’s performance and its contribution to your overall strategy.

Action Steps:

• Develop a clear and disciplined testing process.
• Specify the number of trades you consider sufficient for evaluating the indicator’s effectiveness.
• Regularly review and refine your approach based on test results.

Conclusion

Adding new indicators to your trading system can undoubtedly enhance outcomes, but only when approached strategically. Before making changes, take the time to ask yourself these four critical questions:

1. Am I fully utilizing my existing system?
2. Is adding another indicator the most impactful change I can make right now?
3. Do I have clarity on what the new indicator should achieve?
4. Do I have a formal testing process in place?

By addressing these questions, you can ensure that any decision to incorporate a new indicator is well-informed and aligned with your broader trading goals. Thoughtful preparation and disciplined execution will ultimately yield the best results for your trading journey.