Hi All,
Very good posts by many here. I don't really disagree with what has been said about indicators here, but I'd like to add my thoughts to the thread. I don't get caught up on what's an indicator and what's not indicator. For me, what's important is whether there is lag and whether the "indicator" is based on market-generated information, such as the Market Profile, Price, Volume, Ticks, Trin, Breadth, etc. In general, I don't refer to Market Profile and market internals as an indicator, but it is all technical analysis. For me, an indicator is derived from market-generated information, such as price and volume, and has lag.
These days I don't use indicators much because I prefer to trade using Market Profile and market internals. But like I've said before, indicators can be useful in helping a trader interpret the price action in a chart. Sometimes it is easier to see a pattern, momentum, price impulse, OB/OS condition from an indicator than from price itself. There's nothing wrong with that. But make no mistakes about it, everything an indicator shows is right there in the price chart.
The problem with the use of indicators is in the way that most traders use indicators and what they expect to get out of them. From what I've seen, many traders tend to use too many indictors, jump from indicator to indicator, and/or experiment with different indicator parameters looking for the holy grail. They try to use indicators for buy/sell signals without really knowing how to interpret what the market is doing - not everyone, but most I think. This is where I think the criticism of indicators is valid. Perhaps misplaced though... One thing I believe wholeheartedly is that new traders should learn to read price action before relying on technical indicators. I will also go as far to say that trading based on indicators alone, without market understanding, is not a long-term strategy for being a consistently successful trader.
Kiwi, you contributed a very good post and I agree with most of it. I also agree that there is no lag when using a level as support/resistance. However, my issue with using a moving average as support/resistance is the reliability of the MA itself. Why should an arbitrary MA provide support/resistance for price? Because most traders use it? For me, that's not a good enough reason to risk my money. From my experience, support/resistance derived from Market Profile, with market understanding, is far superior to a moving average or any indicator that I have come across. Personally, I know that I could never trade large size using a strategy that is based on the "squiggles and wiggles" of what I consider to be indicator. I just cannot put that much significance on an indicator, but that's just me. However, with Market Profile, it's different. Market Profile suits me very well.
No doubt that I am pretty fond of Market Profile, and I would even say, that it is probably the best and most original contribution to technical analysis over the past few decades if not longer. But Market Profile has its lag too, and as a trader, I need to know the TA tools I use inside out and when they don't work as well. Market Profile is great for determining value when a market is in balance, but Market Profile is not as useful in finding value when a market is trending. When a market is trending, you cannot determine value because the market is in search of value, otherwise it would be facilitating trade within a trading range. I say MP lags in a trend because price is either chasing value, or vice versa.
For the record though, I will say that my favorite indicators are the Keltner Channel with a 20EMA, a modified MACD(3, 10, 16), and the ADX(14). And occassionally, I'll use them for confirmation, especially on a tick chart, but NEVER to give me a buy/sell signal.
Bottom line for me is would I quit my job as an Engineer to trade using a strategy that is heavily reliant on indicators? No, I would not. I do not see long-term trading success in that scenario. But I would, and will, to trade market development and market structure using Market Profile. I've bought into this whole Market Profile thing, hook, line, and sinker.
P.S. I've been trading part-time for about 2 years and this is my opinion thus far. I started with trend-following mechanical systems, moved on to discretionary trading using the indicators listed above (after learning to read price action) and multiple timeframes, and now I am using Market Profile, which has made all the difference in the world in my trading and has given me a huge trading edge. Like most of you, I daytrade primarily (whenever I get the chance).