Do pro traders actually use indicators?

If you wonder why professional traders use technical indicators, there are at least two reasons. First, many technical indicators were developed by experienced traders. Second, if professional traders didn’t use indicators, technical analysis wouldn’t exist.

However, there are skeptics, and Princeton economist Burton Malkiel is one of them. He claimed that technical tools must be self-defeating: “The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future.” It stands against the core technical analysis concept — trends repeat themselves. 

Basic trend indicator: what is MA (Moving Average)?

Let’s find out what kinds of traders rely on technical tools. 

Technical and fundamental analysis

There are two types of analysis — technical and fundamental. A common recommendation is to combine two approaches. However, some traders rely either on fundamental factors or technical analysis. 

Fundamental analysis is an approach that implies using fundamental factors such as news, economic data, and financial reports to predict a price direction. Fundamental analysis is mostly used by long-term traders. For example, stock traders study financial reports, business goals, current industry conditions, and overall macroeconomic factors to determine whether a company will grow or suffer. 

Also, fundamental analysis can be used by short-term traders who prefer trading on low timeframes and high volatility caused by news releases. For example, the Fed’s interest rate decisions cause high volatility in bitcoin’s price before and after the release. 

However, short-term traders can’t trade without technical analysis because fundamental factors can determine good entry and exit points. 

The Buffett indicator. What is it?

Technical analysis allows traders to determine entry and exit points based on indicators, chart patterns, and support/resistance levels. Technical indicators provide vital information, including the strength of bulls and bears, a level of volatility, overbought and oversold market conditions, and the strength of price movements. They allow traders to analyze the market fast. It takes several minutes to add an indicator to a price chart and evaluate the signals it provides. 

What traders use technical indicators

Not only short-term traders use technical analysis. There are other types of traders that consider indicators as effective tools. 

1. Short-term trading

Scalpers and day traders trade on low timeframes. They must react to constantly changing market conditions fast. To enter and exit a trade at perfect points, they need to identify levels where the price will likely turn around. 

The levels can be determined with technical indicators. Also, traders can’t evaluate by themselves whether an asset is overbought or oversold or whether bulls and bears are strong, but indicators can. 

2. Multiple-timeframe trading

Some traders trade one asset on different timeframes simultaneously. Even if a trader determines support/resistance levels on one timeframe, these levels won’t work on another. Volatility in one timeframe won’t correlate with volatility in another. Therefore, traders apply technical indicators on different timeframes. 

3. Trend trading

How to combine indicators properly

You may wonder why trend traders need technical indicators when trends are visible without additional tools. However, without indicators, you may enter an ending or a weak trend. Therefore, you need indicators that reflect how strong the trend is, how long it has lasted, and how long it may last. 

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What indicators do professional traders use?

You may find numerous articles telling what indicators professional traders use, but there is no such list. Traders choose indicators based on assets they trade, timeframes, the number of assets they have, frequency of trades, etc. 

Most of them will use traditional indicators such as relative strength index, moving averages, moving average convergence divergence, Fibonacci levels, volumes, and Bollinger bands. These tools have proved their reliability. However, it doesn’t mean they can’t implement other indicators such as Alligator, Awesome Oscillator, Average True Range, or Stochastic. Also, some professional traders develop their own indicators. 

Takeaway

Professional traders use technical indicators, especially on short-term timeframes. Indicators provide buy and sell signals and help traders evaluate market conditions quickly. They are calculated automatically and change every time the asset’s price changes. This makes them a necessary tool.

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