Indicators

The indicators are usually of two types – trending and oscillators. Oscillators show whether the underlying asset is either oversold or overbought, and work well when the market is traded in a range. When the market breaks out of the range, oscillators stop working (e.g. Stochastic or RSI)

Trending indicators are usually built upon moving averages. They work well when there is a trend, and don’t work when the market trades sideways. It’s up to you to decide which indicators (or combinations thereof) you should choose, however, you r choice will have to depend on the market type you prefer to trade. Personally, I prefer to trade when there is a trend, because the specifics of trading gold is such that one could make significantly more money in a trend versus a range. The advantage of moving averages is mainly their simplicity, and, as a result a lesser probability of things going wrong.

One of the main uses of moving averages is determining whether or not there is a clear trend.  It’s done simply by comparing the position of the faster moving average with respect to the slower one.  If the faster moving average (MA) is parallel to the slower one while located above it (see picture below), it means that there is a clear uptrend present, if the faster MA is below the slower MA while moving parallel to it – you have a down trend.  

moving average
Here you can see an example of an uptrend on a 4 hour chart.  The 5 period MA is in blue and the slower 20 period MA is in red.  While they are moving in parallel you have you can see a clear up-trend between Feb 16 and Feb 21-22. When they start crossing each other the market moves into the sideways pattern, indicating that this current trend is over. 

We should note that the choice of MA period numbers is different for each market.  What works for gold, does not work (from my experience) for oil, however the principle of determining whether or not there is a clear trend is the same in any market. 

A good system is not overloaded by indicators.  The simpler the system the more chances it has of long-term success.  Usually it is not desireable to use more than 3 indicators.