Divergences: Indicators?

[torero]

It all comes back to price action and chart reading. Many cannot differentiate between a trend, strong trend, weak trend, or trendless ranges. Understand these differences requires chart reading skills. So if they can't identify the differences, there lies the problems for indicators. Indicators works but only when the market is optimal for them.

I've tested many trading systems based on indicators alone or combined, the results are not decent enough to even take it to the next level, no matter how much optimization is tested (changing the indicator parameters), win/loss ratio is between 20-40% (40% is considered good if the avg win is at least 2x the avg loss). These work best in daily or higher but practically everything works better in daily or higher timeframes. Incorporate price recognition logic increases the percentage because the entry and exit execution is more precise.

[namstrader]

Kiwi,

I am so glad you have joined this forum. I have read your posts for over a year at other sites and your shared comments have been very informative and useful.

Thanks for your sharing.

Namstrader

[ezduzzit]

GRrrrrrrrrrrrrrr....

I must say that in reading this thread I was surprised at the tone expressed by some as they voiced their own personal opinions on how one way is, at least to them, clearly superior to another, especially as though that should mean it would be true for others. It seems that some people feel strongly that they have somehow reached another level in their trading that clearly most traders should aspire to. Well, don't you believe it. If you have been around in Life as long as I have then you have almost certainly been smacked in the face again and again with the fact that one man's meat is another man's poison and that what works for one often doesn't work at all for another.

You can safely assume as fact that some people trade better with indicators and some trade better with watching pure price action, while yet others trade better with a smattering of both. Opinions one way or the other don't change that one iota so don't ever accept other trader's "opinions" to the contrary. Opinions are pretty much like derrieres (your posterior heh, heh) and pretty much everybody has one.

Some traders may think they have "graduated" beyond the need for indicators and that is fine as there is plenty of room in the markets for all types. There is no such thing as a pure best method of trading no matter how much some may wish to protest to the contrary. What is reality? Reality for any particular person is the result of how that particular person experiences Life events. It is based upon their own unique ways of processing information through the filters of their own life experience, opinions and already formed beliefs. The self same events may be processed quite differently by another person of a different background, culture or belief structure and thus one person's view on something external to them is nothing more than their opinion.

Does that make it the right way to go for you and will you receive the same results and experience that others are claiming from following the same methods or practice? The answer is often "absolutely not". Does that mean that their opinions don't hold value, at least to them and possibly even to you? Not at all, but I would first and foremost suggest you never accept any of it as absolute truth and that you simply try it out for yourself (if you wish to do so) and see if it holds up in your own experience. You may be surprised to find that you get very different or even quite opposite results. That is what makes Life interesting, otherwise the whole experience here on Earth would be boring as heck!

So that I don't get wildly criticized here for not taking at least some type of stand, let me just say that my own personal experiences tell me that indicators can be useful to me (not necessarily for others, as they have to experiment for themselves.) However, I tend to use them for easily and quickly determing the tone or trend of the market at a single glance. When I focus on price or especially on tape reading, I can often get so caught up in the nitty gritty moment to moment action and spread of the range that I sometimes forget the overall trend in the period I am trading and in the next confirmation time period I am using), but I personally do not use them as actual trading signals. As I pointed out in another recent post, it is my personal opinion that constantly looking in your rearview mirror is a most challenging and inefficient way of driving down the street without having a major accident. I guess that is my personal way of saying that lagging indicators, even if they are enhanced and smoothed and only lagging minutely, are often good to spot trend and tone of the market and for those that need it, even confirmation of price action, but could prove somewhat hazardous to your trading if used as the actual signals to take trades. To my way of thinking, that last comment is far more accurate for daytraders than for position or swing traders but I had best let those types of traders speak for themselves.

Having said that, I can tell you I have a few trading buddies who say they have removed all their indicators and say they rely purely on price action. Well, in competition, we are almost dead even on who consistently takes the most points out of the market on a consistent basis. If you haven't figured it out yet, trading is about a great deal more than whether you mostly follow price action, indicators or both.

However, all is not lost! You can still have a good laugh when the price action folks try to persuade you to their side of the fence, especially when you realize that VAL, VAH, POC (point of control), Balance Lines, Dual Purpose Trend Lines, Floor Pivots or Support and Resistance Lines,etc. are all indicators of sorts and yes, they depend on them as much as you do on your own indicators, whatever those may be. So have a nice little chuckle inside and then go on about your trading.

Again, never accept any trader's pronouncements (or even those of a group of traders who agree) as the final edict on the best way to do something, not even if it is a famous trading guru and certainly not just from traders in some online forum (me included!) Find what works for you personally and then trade it tenaciously, never letting anyone shake your faith in something as long as it continues to perform.

Happy Trading

[torero]

I totally agree. Shouldn't listen to anyone without doing your own homework to verify it or not. It's my opinion, and it's only ONE opinion, so shouldn't take mine as is. I only emphasized that learning to read charts is important. I am not dissing indicators at all. I myself use a few indicators. They work better if a trader understand how price action works before applying them. At least understand how the formula of the indicator work before trading it if he's doesn't want to learn to read charts. Say, if a trader knows that oscillators work well only in range-bound markets, then he's already got a foundation of understanding in chart reading for that particular indicators.

[wrines]

I find it odd when some people claim "indicators" do or do not "work". I also find it odd when I hear some people claim they dont use "any" indicators. If you use ANYTHING other than tape of the security you are trading, you ARE using indicators, as was just mentioned. Now, as for whether or not they "work", that depends on what you mean - lots of indicators "work", but the caveat is that everything is dependent on the underlying data they are based on. If they are BASED on price (past price obviously), then they WILL LAG THAT DATA, no matter how they are computed, and so I understand, and to some extent agree with those that find it cleaner and simpler and most importantly, most timely, to just be rid of them and use price alone. For those that hope lagging indicators will forecast future movement, they are often WRONG, which typically negates any edge the trader has on the occasions when they DO forecast correctly future movement, hence most traders LOSE MONEY.
Having said that, I do see the value of using some indicators if they help to visually explain what HAS happened, in the past (which is of dubious merit, IMO). On the other hand, using indicators such as POC/VAL/VAH and pivots do not LAG prices even though they are calculated on past data, and therefore can at times be useful to support or confirm the trades based on price data. More useful than indicators BASED on current prices that are then intended to forecast future movement. Just my 2 cents.
W

[ezduzzit]

Hmmm... good points Wrines...

It is amazing to me that traders are still wasting their time trying to "forecast" the next movement rather than simply going with the flow. I daresay most traders couldn't even tell you from moment to moment if the trend has really even changed or not. I say, learn to become a master of the obvious. The support and resistance type indicators mentioned seem more "predictive" simply because of two things:

1. History tends to repeat itself to some degree; and
2. Big traders are often on the sidelines for a good period of time and they are there for a reason. They have key points at which they will enter the market (and if you want to know where those areas are, simply study a market profile or volume profile chart for recent periods.)

To my way of thinking, that is more than sufficient reason to pay serious attention to those types of indicators. Again, just my opinion and nothing more.

Happy Trading

[Soultrader]

Very true ez. This is why the markets move from one key price level to the next. The markets will never reverse at a random location. They reverse at levels where the big boys are simply looking to buy or sell.

When using pit noise, sometimes you will hear about a top tenner (one of the top ten biggest floor traders) fighting the entire market. I will often get on his side and fight with him. I have seen more right than wrong from these big players.

[Kiwi]

Darn,

You've got my attention again. We are in two of the (imho) silly loops that we keep getting into in trading arguments. Loop 1 is the predict/don't predict argument. Loop 2 is the lagging/leading argument.

To a degree both are rubbish. To a degree both seem to be "more experienced (??)" traders getting frustrated with misconceptions less experienced traders display. In particular the hope that anything will give you certainty, and that more things will give you more certainty.

The way I, personally, display this problem is trying to apply volume, market profile, market delta, volume momentum or anything but price derived data to the HSI. I am searching for a better probability of being right (instead of just trading with the probabilities I get from my method).

So lets attack the misconceptions (and hopefully not make enemies while I do but it won't be the first time if I do):

1) Predict/Don't predict.

predict
v 1: make a prediction about; tell in advance; "Call the outcome
of an election" [syn: foretell, prognosticate, call,
forebode, anticipate, promise]
2: indicate by signs; "These signs bode bad news"

Everything we do in choosing our entries and exits is about predicting. If you buy at the bounce on the LVA you are predicting that there is a high probability that you will move down X before you retrace Y and thus the trade will have a certain win ratio and win/loss that gives a good expectancy. You are predicting. What you are not doing (I hope) is making the beginners mistake of assuming that there is a certainty associated with the prediction.

Similarly when I see price bounce of a carefully chosen ma after making (say) only 2 thrusts away from the ma I am predicting continuation (x% chance based on history) and thus enter a trade. A second bounce of the same MA may have a higher or lower probability and thus may cause me to increase my bet size or lower it.

Even going with the flow is forecasting. We forecast that if its flowing up now then it will keep going up for Y with a risk of X.

But lets be realistic; if we analyse price and volume, we then predict a probable outcome. Similarly at exit time we exit because the probability of continuation drops below a certain level.

2) Leading vs Lagging.
If you smooth data to build an indicator then the data will have lag built in - and T3 mas, hull mas, and jurik everthings are an attempt to use better signal processing algorithms to get more smoothing for a given time shift in the output (lag).

But. CCI's don't lag the data because the prime determinant of the output is the current price of the current bar.

But. It doesn't really matter anyway for many forms of discretionary trading whether there is a lag in the indicator or not. Its whether there is a lag in the usage of the indicator. For example, EMAs have plenty of lag. But I don't care because I use an ema the same way you use a POC ... its support and resistance and as support and resistance it has no lag. The ema represents in real time with no lag exactly what every other trader looking at it as support and resistance sees so if price reacts appropriately at the ema (or the cci does) then I react without lag to reality.

But. Pure price can have lag. If you buy support then thats "zero lag." If you wait for it to reject support thats lag. If you wait for it to form a double bottom at support thats more lag (vs just buying). So even in pure price trading you have lag and the lag is a trade off of increased certainly for time and probably position.


So IMO predicting is what we do. What we must understand is that every prediction has a probability of being wrong so we must have an exit when its wrong and we must really understand that its probabilistic. The enemy is false confidence (and resulting disillusionment) not prediction.

And how bad is lag. This is a game of predicting and probabilities and risk vs reward. We trade two types of risk: risk of being wrong vs risk that when we're wrong we give more back. What do I mean by that? If you buy at the ema with a 3 pt stop you might have a 50% chance of being wrong but only risk 3pts to find out. If you buy after price forms a rejection pattern from the ema you may need to use a 7 point stop but have only a 30% chance that you are wrong. The second had lag but in return for the lag you get a higher probability of being right (at the expense of a higher risk and less reward (because you are part of the way to your target)).

OK. Monologue over. Hopefully that makes sense.

[wrines]

It does, and I couldnt agree more.
W

[namstrader]

always an ally and sponge to your wisdom.