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.
10-12-2006, 01:14 AM
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