Divergences: Indicators?

[newtrader]

Ive read alot on this forum about indicators being useless. However, I do think price and indicator divergence signals can be taken as a powerful trading signal.

If divergences such as RSI and MACD offers trading opportunities, why dont you guys use them? Thanks

[Soultrader]

I agree to some extent that price and indicator divergence can create trading opportunities. But I trade better without it. Its up to you newtrader whether you want to rely on them or not.

[carter]

Cuz they suck. lol

[Dr Who]

	Quote:	newtrader
	Ive read alot on this forum about indicators being useless. However, I do think price and indicator divergence signals can be taken as a powerful trading signal. If divergences such as RSI and MACD offers trading opportunities, why dont you guys use them? Thanks

Simply looking at divergences doesn't tell you WHY? Employing other methods at least gives you more insight. MACD tells you what price tells you as does RSI. Looking at divergences is like looking at a newspaper without taking it all in - sense my analogy? The talk is there, but what is in the talk? Tape reading helps.

[ant]

I agree that divergences can provide powerful signals when used properly (e.g., divergences should be ignored in strong trends) and I certainly look for them as price approaches key reference points. I don't have a problem with indicators provided that the trader does not make decisions based on those lagging indicators. However, using indicators to see what is already in the chart is not a bad way to use them. In other words, using them as a "crutch for the eye" is one way of putting them to good use because sometimes it is easier to see pattern formations in an indicator then in a chart, but keep in mind that those signals/patterns are already present in the price action. For example, how does price behave when a divergence is being formed? Well, in an uptrend, the subsequent upswings get shorter and shorter indicating a loss of momentum. Another way to put it is that price goes up less points on each subsequent upswing or it takes more bars to cover the same distance as the previous swing. You really don't need an indicator to see this. I primarily analyze price action and use market internals (Tick, volume, bid/ask) to look for divergences. Basically, I trade market development and market structure using the Market Profile graphic.

The problem I see with traders and indicators is that traders tend to spend way too much time focusing on which indicators to use and tweaking indicator parameters thinking that the "perfect" indicator and indicator settings will be the key to a profitable trading. This is the wrong path to successful trading, IMO. Most traders use indicators and most traders fail. If you want to succeed you need to do something different then the majority of traders. Most traders, I believe, use indicators because they want green light/red light signals and don't want to think for themselves.

Once I removed indicators from my charts, I started to focus on more important things, such as reading price action, understanding how the markets I trade move, focusing on risk/reward and money management, determining whether buyers or sellers are stronger, and identifying where the longer-timeframe players are jumping into the market. The point I'm trying to make is that indicators only "indicate" what is already in the price and one should learn to read price action before starting to rely on indicators. I believe that when traders learn to interpret price action, traders will realize that indicators are useless for the most part. I believe focusing on market-generated information, instead of indicators (which are a derivative of price), is essential for developing a robust and sound trading methodology that will withstand the test of time.

[Soultrader]

Very nicely said ant. Ive been receiving alot of critiscm in other forums everytime I mention how indicators are useless.

I am 100% with you all the way. Indicators are USELESS. There I said it.... this is official. The fact that traders are able to trade with price only proves how useless indicators are.

	Quote:	ant
	I believe focusing on market-generated information, instead of indicators (which are a derivative of price), is essential for developing a robust and sound trading methodology that will withstand the test of time.

AMEN!

[tortoise]

Indicators are signal processing. That's it. Signal processing is useful, so long as you're clear on the signal being processed.

I began trading as an indicator junkie. Later, I came to see indicators as "useless" and relied on price action/market internals alone. Then, as my understanding of market dynamics deepened, I brought a couple of indicators into the picture. I have found them, most assuredly, "useful".

But...

I use them now with the understanding of what they are and what they are NOT.

What they are -- visual representations of signal processing algorithms

What they are NOT -- substitutes for a thorough understanding of what's really going on.

[torero]

Why go to middleman when you get to the source itself? Most indicators are based on price. Understand price action first then you can understand when and when not to use indicators because from price, you know how indicator behaves and why.

An analogy, if you understand Spanish and someone is speaking to you in Spanish, would you get an interpreter in and have him interpret to you what he says or would you just listen to him directly?

[Soultrader]

Totally agree with you guys..... but its almost impossible to convince indicator based traders that price action is the holy grail. Its like a religion... traders find it hard to convert.

I had a discussion a few weeks ago and openly stated how indicators are useles. The response I received was unbelievable. Traders were actually defending their unprofitable systems!

[Kiwi]

I wouldn't agree that indicators are worthless. I would agree that believing that your indicator is telling you the "whole truth" is a less than optimal strategy.

I use two indicators ... I have emas on my main entry chart and I have the same emas plus a cci mapped onto my short term exit and "fine tuned entry" chart.

The emas are selected because over a long period of time (several years now) they have been support in weakly and strongly trending markets. Watch the markets: if you can find emas that create support in a trend and help you too see when the trend has changed then they are useful.

For me they help me see that a retracement is "sufficient" and thus likely to end before the "trend" resumes. They also help me see when the retracement is probably reversal but there is a mix of ema and price behaviour required to convince me of this.

The CCI I use for one thing only. I count short term thrusts and when the third thrust or one that corresponds with prior highs or lows is divergent I look for a price action based exit. Thats all ... it works for me.



Edit: The use of indicators doesn't preclude the use of price action/support resistance to fine tune entries. Also the CCI will show divergence not visible in pure price action because the CCI's normalizing function takes into account the recent range - but like everything in discretionary trading you have to figure out what will work for you.