Top 3 Indicators

[Tams 20]

No problem my trading brother. Interesting concept with the goldfish indicator. Do you have backtested results which you can share?

 

are you trying to turn this into a private conversation ?

 

 

 

I have no objection to it... just saying...

[BlueHorseshoe 10]

Interesting concept with the goldfish indicator. Do you have backtested results which you can share?

 

Are you fishing for tips?

 

A serious (if somewhat vague) response to the OP, is that I am interested in anything that achieves the following:

 

1. Any totally recursive method of long term trend definition.
   
2. Any approach for the short term normalisation of price.
   
3. Any statistically appropriate and robust data-mining technique capable of measuring auto-correlation and mean reversion tendencies along with historically optimal thresholds in number 2 above.
   

 

Ironically, although that was an attempt at a meaningful response, it's probably even greater gibberish than my earlier sarcasm!

 

BlueHorseshoe

[optiontimer 10]

...The math based indicator argument is really broken and divided into two groups. One group that believes similar to me. And the other group swears by them. Since so far I haven't heard a compelling argument to resolve the obvious flaws. This is really a bad thing because this suggests that the traders that swear by them I doubt are making money and are only looking at them in the past or in back testing.

 

I've been in this trading game for more years than many TL poster have no doubt been breathing. I have been on either side of this debate at one time or the other, defending one and then the other with a dogmatic zeal that I now find embarrassing. I fit into neither of your camps: I neither swear by or sear at indicators. I am quite comfortable trading off a naked price chart; but I also have found that yes, there are situations in which using indicators properly can aid in defining an edge and deciding to make or refain from betting.

 

Here are a few things to consider:

 

1) Trading is probabilistic game. Whether we are using indicators or price-only data, whether we are trading from a screen in an office or standing in the middle of the auction pit, any decision we make to place a bet is always at best a probabilistic decision. When we place a bet, we are simply saying that at this moment, we feel price is more likely to zig rather than zag. So let us agree that neither indicators, price action, nor direct immersion in the heat of the auction battle can provide an edge that approaches certainty.

 

2) Charts of price record past transactions, not future transactions, and not even concurrent transactions. Even the quick-paced tick chart lags the market by just that much. Even a price action trader cannot use a bar chart to pick a top or bottom tick with any certainty. A price chart is the raw data. Even a price action only trader will use other information from the record of transactions to make decisions, e.g. prior highs and lows, areas of support and resistance, volume (areas of high trade activity), momentum (is price rising or falling with increasing or decreasing momentum). The only transactions you will ever have a real time jump on are your own, and even then, unless you are entering with a limit order, you will not know with any certainty what your price will be, and if you are entering with a limit order, you have no certainty that your order will be filled prior to some confirmation from your broker.

 

3) It is misleading to call indicators math-based, implying that hey are arbitrary and abstract when they are in fact based upon market data, either price, volume, or some combination. Mathematics is a tool. You say that indicators do not do anything to tell you how the market works. This is manifestly untrue. If you know what an indicator is designed to collate and measure, you can then watch how the market acts with respect to that aspect being measured. Spend a day watching an intraday chart while plotting a short term stochastic, keeping in mind exactly what a stochastic is measuring, and tell me you haven't learned a thing about reading price action itself (and likewise tell me you haven't learned anything about how using a stochastic indicatormight aid in making bet decisions with a positive expectation).

 

4) Finally, you must use an indicator correctly. At the very least this means you must wait until the data series upon which your incdicator's value is to be calculated has closed before using that value as an input for making a decision. If you are using an indicator with a 20 period look back data series, and you act upon its value when the data series is only 19.25 periods complete, you are being unfair to the indicator if you blame it for having a different value (a value that that no longer suports your trading decision) when the twentieth period closes. Furthermore, it is usually wise if you wait for price action to confirm the decision your indicator is supports. For example, if your using an overbought/oversold indicator and it turns down from an overbought reading indicating that price may be more likely to head lower rather than higher, wait for price to confirm this by actually printing a lower low than the low of the immediately prior period.

 

Again, I've spent a good part of my life first on one side then the other. In each case, I felt certain in my view. It is a false distinction, I assure you. It is all merely data, and how we collect it and interpret it. Even a plain naked bar chart is itself an indicator. Yes, it is simpler and certainly less refined (or more unrefined) than its more calculated cousins, but it is an indicator nonetheless.

[BlueHorseshoe 10]

Furthermore, it is usually wise if you wait for price action to confirm the decision your indicator is supports. For example, if your using an overbought/oversold indicator and it turns down from an overbought reading indicating that price may be more likely to head lower rather than higher, wait for price to confirm this by actually printing a lower low than the low of the immediately prior period.

 

Hi OptionTimer,

 

I'm currently enjoying reading through your excellent thread from last year.

 

I'd like to question the paragraph above, however, as I think this is very much dependent upon the market being traded.

 

For instance, taking the approach described in your thread, waiting for an impulse move back in the direction of the longer term trend following a pullback in a market like the ES would not be a wise approach; this market does not exhibit sufficient follow through to justify awaiting this 'confirmation move'. In the ES, it would be more profitable to buy into the pullback (ie buy the oversold reading as the market is falling) rather than to wait for the indicator to turn up again, or for price to close higher.

 

Indices in particular seem to exhibit this type of behaviour.

 

However, as a generalisation across diverse asset classes (which the notional portfolio in your thread is presumably designed to illustrate with various commodity and currency futures), then you may well be correct.

 

BlueHorseshoe

[optiontimer 10]

...For instance, taking the approach described in your thread, waiting for an impulse move back in the direction of the longer term trend following a pullback in a market like the ES would not be a wise approach; this market does not exhibit sufficient follow through to justify awaiting this 'confirmation move'. In the ES, it would be more profitable to buy into the pullback (ie buy the oversold reading as the market is falling) rather than to wait for the indicator to turn up again, or for price to close higher.

 

I bought SP futures on 6/6/2012 when the market rallied back above the May low. Using an approach essentially the same as that outlined in the my thread from last year, I added to the position with follow on buys on 6/27, 7/13, 8/3, and 9/6, and I was stopped out of the entire position on 10/12. I lost a point or two on the contracts bought in September, a loss which was more than offset by the 25 to 125 points made on the initial buy and the other follow on buys. Twenty-five to 125 SPOOS points is decent follow through, I'd say.

 

In each case I could have made "more profit" had I bought my add-ons on the signal day, which would be the day prior to my actual buys. But, like I said, this is a probablities game, and over the long run I think you will actually be "more profitable" by maximing your probabilities rather than trying to maximize your payoff. In other words, I would rather lay 11:10 odds on a 60% probablity than get 2:1 on a 35% probability. And that 2:1 is reduced to a negative expectation, i.e. no edge if your probability drops to 33%. Compare this to all the gurus who will tell you that you can lose 2/3's of your trades so long as you have a 2:1 payoff - at 2:1 odds you need a minimum 33.4% probability over the long run just to breakeven (actually you will have about a 0.1% edge). Have fun making any money with that!

 

The point is this: Win rate (probability) is important, and so is the payoff when right (odds). Most people playing this game think the two are the same, rather than two distinct factors that together determine one's success over the long run. Payoff is important, as it determines what your minimum probability must be to obtain an advantage. However, a small increase in payoff will in general not offset the diminished win rate that results from it.

 

I won't even get into the issue of dealing with a systems adverse standard deviation. But I will say this - it is the maximum standard deviation of your system which truly will determine your chances of losing all of your money.

 

Remember, math is a tool.

 

Now, if only someone would show me a system with a 50% win rate with 2:1 odds that traded three times per day ... we could all retire!

[Trader LAMP 10]

Starting with Tams response in post #14, the discussion has become one of the best I've read on a trading forum. Tam's responses are thoughtful, intelligent, well-written, and in my opinion 100% correct.

 

Very true. This thread has evolved and become extremely useful. I have read everyone of Tams' posts in this thread and have gained some useful information.

 

Here are my 3 indicators:

 

1) My red dart

2) My blue dart

3) My orange dart

 

I throw them at a newspaper every morning and then pick one to trade.

 

Just kidding, here are the actual 3 I use.

 

1) EMA (Exponential moving average)

2) RSI (Relative strength index)

3) Volume

 

I don't have a mechanical system, but they help with decisions.

[SIUYA 11]

For instance, taking the approach described in your thread, waiting for an impulse move back in the direction of the longer term trend following a pullback in a market like the ES would not be a wise approach; this market does not exhibit sufficient follow through to justify awaiting this 'confirmation move'. In the ES, it would be more profitable to buy into the pullback (ie buy the oversold reading as the market is falling) rather than to wait for the indicator to turn up again, or for price to close higher.

 

Indices in particular seem to exhibit this type of behaviour.

 

 

There are also the points that often get missed when using an indicator - even when these points are made time and time again.

You need to match the tool to the job - if your time frame is so small any lag time becomes that important - its probably not the right tool for the job.

If the time frame is too small to capture an indicated move, you could also extend the time frame in order to get the appropriate follow through.

Just because it looks good, does not mean its the best tool for the job. In your example you have a few missmatches - the longer term trend, waiting for confirmation for a short term counter trend move to have finished, the fact you know this is unlikely candidate for such a strategy......almost knowing this wont work but people try and make it work regardless.

[BlueHorseshoe 10]

In your example you have a few missmatches - the longer term trend, waiting for confirmation for a short term counter trend move to have finished,

 

Hi SIUYA,

 

Can you explain what you meant by the above in a bit more detail? For instance, I wasn't suggesting waiting for confirmation that the short term counter trend move had finished (this was my point) - I was suggesting buying/selling into the counter trend move rather than awaiting confirmation.

 

As for matching tools to the job, I would like to point out the following in relation to 'confirmation turns' in banded oscillators . . .

 

If you study the calculation involved you will see that something like the RSI compresses extreme values in a similar fashion to a sigmoid function. This means that as the indicator value approaches 100 or 0 the price counter-movement that is required to cause the indicator to 'turn' becomes infinitely small. As such, the information content of indicator value changes at such levels becomes minimal. The fact that an RSI was at 100 yesterday but has now turned downwards is telling you virtually nothing at all (although the fact that it reached 100 is arguably very useful information).

 

Finally, my earlier comment was not a criticism of OptionTimer, who is clearly a far more experienced and capable trader than I am; I just wanted to highlight that indicator use should be market specific as well as system specific, and that understanding the actual historical behaviour of a market, rather than its idealised or perceived behaviour, is vital.

 

BlueHorseshoe

[BlueHorseshoe 10]

However, a small increase in payoff will in general not offset the diminished win rate that results from it.

 

Hi OptionTimer,

 

Thanks for your reply.

 

In my experience, what I was describing would greatly increase the percentage win-rate, and also reduce the payoff, assuming a dollar optimal exit or similar was used. As far as a mechanical system goes, I am almost certain that gunning for a 125 point excursion in the ES is neither dollar nor win-rate optimal - what is 125 points as a percentage of yearly range in that instrument?

 

If you exited all positions with a profit target at the high/low prior to the correction, what effect would this have on performance? I would guess more trades, shorter holding time, higher percentage win-rate, and lower average profit per trade.

 

As I said before, if we were talking about countless other markets then this would be madness, but for the ES, historically, I feel it's an unavoidable reality.

 

BlueHorseshoe

[Colonel B 10]

You have chose to talk about things that don't work for you. It shows that deep inside you, you believe that they should work, but you are angry (or disappointed?) that you have not found a way to profit from them.

I noticed in your previous post you mention a 5 min chart... my suggestion is to take a step back, look at the big picture, then develop a strategy to tackle the intraday challenges.

 

Oh totally Mr. President. I would say that is accurate. I think this is one of the main obstacles with retail trading now a days. Almost everyone starts out with some sort of math based indicator. Are they inherently bad? No just not that great. They have tons of flaws. Now if you can look past them or figure out a way to make them work for you then that is great.

 

I mentioned the 5 minute thing because most folks seem to use something like that or similar. I don't use anything like that.

[optiontimer 10]

As far as a mechanical system goes, I am almost certain that gunning for a 125 point excursion in the ES is neither dollar nor win-rate optimal - what is 125 points as a percentage of yearly range in that instrument?

 

I'm not so much gunning for it as I am taking what it gives me. I'm not sure we are speaking to one another with the same thing in mind. For example, I'm sure I do not see how exiting at certain prior swing points helps one's cause, presuming one's cause is to get as much as the market is willing to give. Unless, of course, we are discussing day trading. I do often use targets to limit out of a trade when day trading, though that depends on market conditions at that moment for the instrument I am trading, and not the instrument itself. For example, crude is working on a second consecutive inside day. If I were day trading crude today, I'd likely use a limit order to take profits today rather than a trailing stop. However, if I were day trading crude the day it breaks out of what looks to be a likely three day range, I'd be inclined to trail a stop, and grab as much of whatever trend develops as I can.

 

Also, I would not think that winning percentage will increase if you remove price confirmation from the picture.

[SIUYA 11]

Hi SIUYA,

 

Can you explain what you meant by the above in a bit more detail? For instance, I wasn't suggesting waiting for confirmation that the short term counter trend move had finished (this was my point) - I was suggesting buying/selling into the counter trend move rather than awaiting confirmation.

 

As for matching tools to the job, I would like to point out the following in relation to 'confirmation turns' in banded oscillators . . .

 

If you study the calculation involved you will see that something like the RSI compresses extreme values in a similar fashion to a sigmoid function. This means that as the indicator value approaches 100 or 0 the price counter-movement that is required to cause the indicator to 'turn' becomes infinitely small. As such, the information content of indicator value changes at such levels becomes minimal. The fact that an RSI was at 100 yesterday but has now turned downwards is telling you virtually nothing at all (although the fact that it reached 100 is arguably very useful information).

 

Finally, my earlier comment was not a criticism of OptionTimer, who is clearly a far more experienced and capable trader than I am; I just wanted to highlight that indicator use should be market specific as well as system specific, and that understanding the actual historical behaviour of a market, rather than its idealised or perceived behaviour, is vital.

 

BlueHorseshoe

 

dont take it as a criticism from me, or your comment to Option timer - i was agreeing with you - you always point out the ES is not the best for breakouts, and so you just need to find the right tool - and when i say miss matches - it was more along the lines of - if you are short term day trading, then the long term up trend may provide context, but an oversold indicator may not be the right tool - for swing trading maybe, but intra day - is it oversold from what? - the open, the high, relative to the daily (but you are intraday) thats all

inidcators IMHO are certainly market specific, and market type specific. Why I try not to use them really - its too tempting to try and fit things into what you want as opposed to what is happening.

[Colonel B 10]

I wasn't going to comment on this one and answer a previous post on what I use but there is so much that I absolutely agree with and deserves repeating or appears incorrect that I figure it needed clarifying.

I've been in this trading game for more years than many TL poster have no doubt been breathing.

Great!!!! Now please explain how you calculated a fast and slow stochastic on the fly in the pit? I don't know a good slow and fast speed so just use ones you used in the pit you traded. What speed MA did you use? How did you calculate it? o.O?

 

I fit into neither of your camps: I neither swear by or sear at indicators. I am quite comfortable trading off a naked price chart; but I also have found that yes, there are situations in which using indicators properly can aid in defining an edge and deciding to make or refrain from betting.

The main point to what I was trying to say was that either you use them no matter what anyone says or you don't no matter what anyone says. With no admittance that there are flaws on either side of the argument. Especially the ones I have mentioned. I don't think you have to love them or hate them. Clearly they are situational for you and that is fine. Or you have found something superior. I think this shows what I was suggesting.

So let us agree that neither indicators, price action, nor direct immersion in the heat of the auction battle can provide an edge that approaches certainty.

Totally!!! With out question. Would you agree that more indicators then reduce your chances? Or at some point they don't increase probability and become ineffective? Since nothing can be certain.

It is misleading to call indicators math-based, implying that hey are arbitrary and abstract when they are in fact based upon market data, either price, volume, or some combination. Mathematics is a tool. You say that indicators do not do anything to tell you how the market works. This is manifestly untrue. If you know what an indicator is designed to collate and measure, you can then watch how the market acts with respect to that aspect being measured. Spend a day watching an intraday chart while plotting a short term stochastic, keeping in mind exactly what a stochastic is measuring, and tell me you haven't learned a thing about reading price action itself (and likewise tell me you haven't learned anything about how using a stochastic indicator might aid in making bet decisions with a positive expectation).

Yes math based indicators are based on past market data. I totally agree that they are not random or arbitrary. Its not that they are arbitrary but rather give you no edge. Any edge you think you are getting from these things is not what is actually considered an edge. Yes there are some indicators that are not math based. The ones I am targeting are the ones that strictly use math. An example of a math based indicator is MA, Stochastic, Fibs, MACD, Bollinger bands, CCI, Woodies CCI, RSI, and even the popular VWAP. None of the aspects measured with these indicators is going to tell you when buyers/sellers are getting trapped. Its all past data so if they do show an over bought/sold signal its only after they are trapped and the damage is done not before or leading up too. I will even go further to say that some of these things will trap you and cause you to be short in the hole. Actually no math based indicator that I recognize in this whole thread will exclusivity lead any person to know what is actually making the market work. Or how a market moves. Or when it will move. Or what it will take to move it. If they did explain then you would have more informative conversations and less of "the robots are in control" explanations I see in other threads. None of these indicators will teach a trader where the longs or shorts are going to puke or if they are puking right now. Actually these indicators if used exclusively will actually convince you that the opposite is happening. Now with that being said does price bounce off of MAs? Yea sure. I am not so blind to see that it has happened. But to me its not the MA that makes it bounce but rather other things at work. I consider it a correlation fallacy. Most of what they measure is not inaccurate. I think it has very little relevance to what is actually important.

Even a plain naked bar chart is itself an indicator. Yes, it is simpler and certainly less refined (or more unrefined) than its more calculated cousins, but it is an indicator nonetheless.

FINALLY!!!! This was the question I asked in my first post. You and I may not agree. Or maybe we agree I just didn't read what you wrote correctly. But yes there is more to "indicators" then just the math stuff that comes in every charting package. I think the nature of the OP and consequently most of the following posts overlooks this idea that charts are indicators. I am going to put up another post with charts so I wont go into it too much. How about looking at correlated markets? Is that an "indicator"? I can see on the 30 year when the 10 year is over bought or over sold. So far no one suggested these concepts. There maybe more then one way to trade. And in other posts I have admitted that I have been disappointed with math based indicators. However if you can make a living on them then I applaud you and anyone else who can. I will be honest and say that I can't. Is this a bad thing? No. I believe failure with them allowed me to find something better.

[Colonel B 10]

So, what works for you? Please explain in detail.

 

The 3 indicators I use if you want to call them indicators are:

1. Correlated markets.

2. Market Structure based on volume.

3. Bid/Ask PNF

 

I attempted to post 1 of my 4 screens. This will show you how I look at a market. You will see on my screen market profile. Its logical to think I am a market profile trader. Not so much. This simply helps with opens, highs, lows and that kind of stuff. It also helps give me and idea where the retail guys is going to enter. I mostly keep my eyes glued to the footprint. These are just 2 of the 5-6 markets I look at or watch.

 

This pic was taken earlier but you can see it was taken real time at the time. I took the trade on the bonds and I am out. You can see on the blue chart shorts getting trapped in that yellow bar. Then you can see large buyers step in. So when the market is going down I look for a level or a number or some excuse for it to bounce. Considering there is a 20 tick range and it is trading in yesterdays range there are tons of reasons for it to bounce. Could be that green line, yellow line, or yesterdays whatever. The magic is when it breaks down and sellers get aggressive with no follow through. Look at how red that is. Buyers INC. When I can see retail get trapped so clearly with plenty time to react the only thing I worry about is getting filled. If you need more detail go ahead and pst me so I can keep this novel shorter then the last. :p

[Tams 20]

Indicators can basically be categorized into 3 levels: (there are more levels, but most are merely an extension of the 3rd level)

 

1. Raw indicators -- they use unprocessed data.

eg. a horizontal line drawn at the highest high of the day.

eg. MP/TPO where the price or volume are stacked on a graphical display

eg. Volume Bar Chart -- eg. where you start a new bar every 1,000 contracts

 

2. 1st degree indicators -- the data are processed, but only once. This is the closest you can get to the raw data.

eg. a 10 period simple moving average where you add the 10 day's close and divide it by 10.

 

3. 2nd degree indicators -- the data are processed more than once

eg. MACD, where you take the XMA and subtract one from the other.

eg. Triple Smoothed Moving Average

 

The more processing you do to your data, the further you are away from reality.

I am not saying if this is good or bad, I am merely describing the observation.

Edited December 11, 2012 by Tams

[BlueHorseshoe 10]

 

1. Raw indicators -- they use unprocessed data.

 

Hi Tams,

 

I think that's a very useful distinction, and would ideally have been placed much earlier in the thread.

 

With what you're calling 'raw' indicators, assuming we exclude price itself, then we are obviously chosing which data points we pay attention to (eg today's high). Is our selection method a form of processing?

 

Also, a category three indicator which uses category one inputs is arguably less abstracted than one using category two inputs. For example, a Donchian mid line (considered as a 1-period average of upper and lower channels) is rather different to the momentum type oscillator obtained by subtracting one moving average from another. Is the Donchian mid-line, for exampe, even processing two other indicators, or is it a one-time process enacted upon selective data?

 

BlueHorseshoe

[BlueHorseshoe 10]

- you always point out the ES is not the best for breakouts

 

I know - I sound like a stuck record!

 

BlueHorseshoe

 

***MMS - you should have someone design a 'stuck record' emoticon for the site.

[marker 10]

I dont post much, but I was reading through this thread and there was a mention of the BullsEye, WaveTrend, and BullsEyeForecaster....I second this!

[Tams 20]

Hi Tams,

 

I think that's a very useful distinction, and would ideally have been placed much earlier in the thread.

 

With what you're calling 'raw' indicators, assuming we exclude price itself, then we are obviously chosing which data points we pay attention to (eg today's high). Is our selection method a form of processing?

 

Also, a category three indicator which uses category one inputs is arguably less abstracted than one using category two inputs. For example, a Donchian mid line (considered as a 1-period average of upper and lower channels) is rather different to the momentum type oscillator obtained by subtracting one moving average from another. Is the Donchian mid-line, for exampe, even processing two other indicators, or is it a one-time process enacted upon selective data?

 

BlueHorseshoe

 

a bar chart is an indicator... it shows you where the price has been.

 

if you don't have a chart, you'd be reading a tape.

[Tams 20]

Hi Tams,

 

I think that's a very useful distinction, and would ideally have been placed much earlier in the thread.

 

With what you're calling 'raw' indicators, assuming we exclude price itself, then we are obviously chosing which data points we pay attention to (eg today's high). Is our selection method a form of processing?

 

Also, a category three indicator which uses category one inputs is arguably less abstracted than one using category two inputs. For example, a Donchian mid line (considered as a 1-period average of upper and lower channels) is rather different to the momentum type oscillator obtained by subtracting one moving average from another. Is the Donchian mid-line, for exampe, even processing two other indicators, or is it a one-time process enacted upon selective data?

 

BlueHorseshoe

 

 

anytime you process the data more than once, it is a level three indicator.

[TimRacette 11]

For futures trading:

Candlestick Chart

Volume

NYSE Tick

 

For swing trading:

Daily Candlestick Chart

20 EMA

50 EMA

[Tams 20]

Hi Tams,

 

I think that's a very useful distinction, and would ideally have been placed much earlier in the thread.

 

With what you're calling 'raw' indicators, assuming we exclude price itself, then we are obviously chosing which data points we pay attention to (eg today's high). Is our selection method a form of processing?

...

 

BlueHorseshoe

 

when i say "processed", i mean the original raw data is altered.

 

eg.

a pivot point is a processed data... it takes the h L c, add then up and divide by 3.

the value of "highest high of the day" remains a price data. it has not been altered.

a trader has a "thought process" to use that data point as an useful information for analysis, but the data has not been "processed" in the sense that the number has not been altered in anyway.

[Tams 20]

there are more than 3 here... you can pick any 3 you like...

 

 

[BlueHorseshoe 10]

when i say "processed", i mean the original raw data is altered.

 

eg.

a pivot point is a processed data... it takes the h L c, add then up and divide by 3.

the value of "highest high of the day" remains a price data. it has not been altered.

a trader has a "thought process" to use that data point as an useful information for analysis, but the data has not been "processed" in the sense that the number has not been altered in anyway.

 

Hi Tams,

 

The number has not been altered, but is the number meaningful in and of itself, or can it only signify in the context of a time series? Selecting data points as you describe does alter the time series.

 

BlueHorseshoe

[equtrader 10]

p-indicator by MIke Harris, hard to interpret at times. It works best when signs of the variables change from long to short or the other way around.