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Day Trading Profit Secrets – How to Reduce the Noise in Your Charting

By Ian Newton

One of the big problems many new traders have is that they apply to many indicators to their charts. After all if 3 are good then 6 or 10 must be better. Wrong, it just creates confusion. There are some simple ways to view your chars and see a clearer picture without the noise. This makes for less stressful trading. There are a number of ways to reduce noise but here is a simple way. Double Bollinger bands.

There is no connection to the famous champagne, unless you decide to celebrate your wins. A Bollinger bands are a pair of lines on a chart which define a trading range. The market is expected to trade within this range and use the bands as a upper or lower range.

Many traders use these as an entry or exit signal, but I’m not quite that confident. The way to use them as a noise reduction filter is to apply two sets of bands. The most standard is a 20/2 combination. That is using a 20 period moving average with a standard deviation of 2. You will see this on your chart when you open the indicators section. This band will give you the big swings.

But if you apply a second band using a 20 period moving average with a standard deviation of 1, then you will have much closer bands. It will show up transition points in trending markets. The market trend has squeezed itself into this narrow range and is bound to break out. How far it will go may be determined by the wider bands.

This closer set will reflect the typically shorter moves within the market and the wider set will reflect the bigger moves. If you have only these two sets on your chart it is easy to see the general tendencies of the market. The wider bands do not indicate an overbought or oversold state of the market as reflected in the RSI.

It is very important to not totally rely on any set of technical indicators. They simply do not work all the time. As the name implies they are just an indicator of what the market may do. There are other factors to consider.

Bollinger bands are part of the trend group of indicators and should be used with an indicator from the Oscillator group. One common mistake is that new traders may use 2 or 3 indicators from the same indicator category, e.g. 3 trend indicators.

The problem is they all measure the same thing, so it will appear that 3 signals are present when in fact it is only one. Learn experiment, discover but be very clear about what you are doing once you start to trade.

and now if you would like my FREE newsletter about day trading just go to http://www.daytradingprofitsecrets.bigpixie.com/Prelaunch.html. Would you like to get my regular day trading blog go to http://daytradingprofitsecrets.wordpress.com.

Happy Trading
Ian Newton

Article Source: http://EzineArticles.com/?expert=Ian_Newton


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