Do we need indicators?

Forexmospherian said:
HI Tim

Away from home still today but will be back tomorrow and can then give you some examples of how certain indicators can give an additional "edge" over using naked charts - especially for short term intraday FX trading.

I can only pass on my experience from forex trading - as over the last 11/12 yrs have not traded any other instruments.

With regards to the numerous standard indicators available on most chart platforms - we know that most are lagging and for example MA crosses or MACD changes happen well after the price event - and so are really no good for real time trading.

For longer term swing traders using 50 -100+ pip stops and after 200+ pip moves - yes than naked charts may be OK - as accuracy of 5 -10 pips either way is not so key and if traders are only taking a few trades a day or week - then they might be happy with 40 -60% win ratios and 3 % - 8% net per month using either 1 or 2% of their retail capital as trade stakes.

However - to increase your returns - you will need improved win ratios - larger RR returns( smaller stops) and of course more trades ie multi trades per day - even if you do not take the benefit of using session wins for compounding.

For me all that points to accuracy - and of course advanced money management - that yet again certain indicators can assist you and help you with your decision making. -

Price alone is not just the key for me - as price is just at one point of time - you need price structure in relation to both static and dynamic S & R - and even supply /demand. Many trader ignore wave movements in larger moves -and so use wider stops. I can basically follow every pip move and then at high probability times - extrapolate or project the next 10 -30 mins by using my indicators- and for me that's as long as I need to sometime catch a trade with an RR of 3 or 4.

A few of those a day and then you do get the telephone number returns ;-) - Although saying that my home phone number as 9 digits and I am quite happy on 2 digit returns - 25 -50% per month on capital accounts under $50k.

I must also say forget the ongoing compounding - tried it - and for me I just could not make it work as my financial "wall" just kicks in too early - ie cannot take $5k losses in under 30 mins - even if it is also possible to have $20k wins - my mindset is only comfortable with losses under $1k in under 30 mins - using my own money - and do i want the palpitations at my age - lol ;-)

More to follow


Regards


F
Click to expand...

Great answer(y)
 
Splitlink said:
:LOL: You are saying that to him? That's made my day. :D
Click to expand...
:LOL:
Yes Split', I'm all too aware of the irony - or should I say hypocracy! Either way, in my defence, I do like to think any lengthy posts of mine at least attempt to address the thread topic or question(s) posed and aren't just an excuse to repeat ad nauseam the same points over and over again. Also, for the most part, my posts are 'boast free'.
Tim.
 
Ok Tim

A proper technical indicator is an indicator that is leading and can predict with some accuracy what price might do in the future - ie not a normal lagging indicator that is just showing what as happened over the period of the chart in the past.

A good example today is on a GU chart by Robert 11 on another thread on the forum -

http://www.trade2win.com/boards/forex/176794-eurusd-gbpusd-analysis-15.html

The best leading indicator I know is a LR 2 - and i will explain more about that when I am back

Tried to keep it short and sweet - yes difficult for me ;-)


Regards


F
 
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Forexmospherian said:
A proper technical indicator is an indicator that is leading and can predict with some accuracy what price might do in the future - ie not a normal lagging indicator that is just showing what as happened over the period of the chart in the past.
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FoMo,
If I've understood you correctly, a 'proper' technical indicator is a leading indicator and an 'improper' one is a lagging indicator.

By this definition, moving averages and MACD are examples of 'improper' indicators as they are both lagging. Whereas, Stochastics and RSI are examples of 'proper' indicators as they are both leading. Is this correct?
Tim.
 
Splitlink said:
TRO has just posted with a video. I think that it is worth reading by all those new to trading and many, not so new, especially when there will be more time to think about these things, over the holiday.

Do we need indicators to assist our entries and exits? He makes a good argument against.

There is, also, the point against spending good money on a "Fantastic New Indicator" that will earn its cost in just a few trades!

http://www.youtube.com/watch?v=BhdZf5iCHLI&feature=youtu.be
Click to expand...

Very good video!
Thanks for posting.

Regards,
psa
 
timsk said:
:LOL:
Yes Split', I'm all too aware of the irony - or should I say hypocracy! Either way, in my defence, I do like to think any lengthy posts of mine at least attempt to address the thread topic or question(s) posed and aren't just an excuse to repeat ad nauseam the same points over and over again. Also, for the most part, my posts are 'boast free'.
Tim.
Click to expand...

Don't take that the wrong way. My post was not digging at you at all, but succinct is not in his vocabulary.
 
timsk said:
FoMo,
If I've understood you correctly, a 'proper' technical indicator is a leading indicator and an 'improper' one is a lagging indicator.

By this definition, moving averages and MACD are examples of 'improper' indicators as they are both lagging. Whereas, Stochastics and RSI are examples of 'proper' indicators as they are both leading. Is this correct?
Tim.
Click to expand...

NO Tim

Sorry - its not that simple - or easy - or black or white - and so Split this is why I cannot always be succinct.

I look upon FX trading as a very complex subject - and not one you can always place clearly under different sections or headings.

So for me - proper and improper maybe the wrong terminology for technical indicators - instead I prefer to refer to technical indicators as lagging or leading.

The four technical indicators you mention - are all lagging - ie change after price moves - but at certain settings under certain price movements - the oscillator pair can be transformed into leading indicators - ie as that bearish divergence on the GU 4 hr MACD was saying - price is becoming OB and so at some point it should fall.

From what I can see with the GU its been bullish and for me it was a buy - until it could no longer post another high at the end of last week - and that's where the bearish divergence kicked in yesterday and today at the 6835 -6800 area - saying price needs to fall.

Naked 4 hr GU traders will still be buying - and if they ware working on 150 -200 pip stops they might be OK as price might find supports above 6700 - and then try up again - and go to 6900 and even 7000+

I therefore really only want to take note of leading indicators and as studies by US universities in the past have shown - most technical indicators over 100's or 1000's of trades are generally just 50 / 50 in terms of prediction success.

Sorry I cannot be more helpful with my explanation - I will see if I can use another example from my archive of past charts once I am back at my desk

Regards


F
 
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FoMo,
Forexmospherian said:
. . .So for me - proper and improper maybe the wrong terminology for technical indicators - instead I prefer to refer to technical indicators as lagging or leading.
Click to expand...
I asked for your definition of 'proper' as it is a term you introduced in your earlier post. You're free to withdraw it and revert to the widely accepted and understood terms 'leading' and 'lagging' if you want - but you might like to think about my next comment before doing so . . .

Forexmospherian said:
. . .The four technical indicators you mention - are all lagging - ie change after price moves - but at certain settings under certain price movements - the oscillator pair can be transformed into leading indicators - ie as that bearish divergence on the GU 4 hr MACD was saying - price is becoming OB and so at some point it should fall.
Click to expand...
Within the context of traditional technical analysis, moving averages and MACD are both lagging indicators. Oscillators such as Stochastics and RSI are leading indicators. Yes they are based on price and change when price changes but, nonetheless, they are still regarded as leading indicators. If you're going to change established meanings and definitions, I suggest you use your own terminology and define it as precisely as you can so that everyone understands what you mean by it. Re-defining established terms just muddies waters that are already pretty murky and is generally unhelpful. In a nutshell, switching from 'proper' to 'leading/lagging' and then saying all indicators are lagging except when they are mysteriously transformed into leading ones is what makes some members think you're merely trying to baffle them with quagmires of bullpoo.

Forexmospherian said:
. I therefore really only want to take note of leading indicators and as studies by US universities in the past have shown - most technical indicators over 100's or 1000's of trades are generally just 50 / 50 in terms of prediction success.
Click to expand...
Any leading indicator will be fairly effective when applied to the right market condition, namely when price oscillates in a sideways trading range. By the same token, lagging indicators will perform equally well in a market that is trending strongly. When that happens, a 'leading' indicator is prone to giving false signals and is unreliable. Needless to say, for those that wish to use indicators, the trick is to identify the market condition first, and to apply the appropriate indicator (either leading or lagging), second. Most academic studies that I've ever seen fail to do this.
Tim.
 
Slapshot said:
So certain price movements setup the indicator....

Read price and you're way ahead of any indicator.
Click to expand...


Personally - I dont think price alone is enough.

For example on the GU recent new high on Wednesday 16th at 6842/3 - price then retraced as you might expect - but did not do a new LH but stayed in a range - well above the previous days low. Then it proceeded to go back up into the 6800 area and rise - encouraging more bulls to enter.

So we had a HL now we just needed a HH - ideally 5 -10 pips above 6843 to confirm another rise and an attempt on 6850+ and then 6900 area.

This is in a bullish channel - price is rising - time to buy with stops at last low ??

As a scalper that's no problem to me as I would probably buy and sell 90% of all trading days - but then if you are relying on price alone - what do you do at 6840?

Carry on buying - or accept any pullback in the bullish mode will stay above the HL ?

Instead today the GU price drops under the last 2 lows from this week and also from last week after it made its high - so most intraday bull traders would been stopped out - unless they are using 60+ pip stops - as far as I am concerned - so wasteful

Instead with the help of divergence off an oscillator - you would know price was topping - and needed a larger pullback than the one it did last Thursday.

The question i would ask many swing traders is - where would you start selling ?

After a LH at 6841 - or at 6831 - or the third LH at 6826 ?

No probably not - most traders would want a lot more confirmation - and probably would not even start selling the GU until under 6800 and even 6785

For me - that's a shame as indicators used correctly were saying - you can sell as near to 6850 as you can - as price is misleading you and if it did do a new high by 1 or 3 pips it would have been false

False sentiment is caused by misleading price

That's only my view - and most willing to be proved wrong :)


Regards


F
 
NVP said:
hmmmmmm

you guys ever read the adam theory by welles ? .............interesting re predictions

N

apologies re the babypips link but its not a bad thread on the subject ....and i think a pdf link somewhere

http://forums.babypips.com/newbie-island/41815-adam-theory-markets-j-welles-wilder-jnr.html
Click to expand...

Hi N

Yes I can remember reading about Adams theory - but it must have been a long time ago - prior 5 years or so after I ditched all existing theories and tried to come up with any method or strategy that would make consistent daily profits in basically any market conditions.

Must check it out again - and with regards to the TRO - never been a great fan - his simple methods do not place enough emphasis on minimum stop levels - time windows and multi trading - along with getting RR over 3 in short time periods - MM efficiency etc etc

I think they are fine for intermediary swing traders etc - but would love to know if you was using his methods if you could make more then 200% per annum on retail size capital - just using 1% capital stakes ??

Regards

F
 
timsk said:
FoMo,

I asked for your definition of 'proper' as it is a term you introduced in your earlier post. You're free to withdraw it and revert to the widely accepted and understood terms 'leading' and 'lagging' if you want - but you might like to think about my next comment before doing so . . .


Within the context of traditional technical analysis, moving averages and MACD are both lagging indicators. Oscillators such as Stochastics and RSI are leading indicators. Yes they are based on price and change when price changes but, nonetheless, they are still regarded as leading indicators. If you're going to change established meanings and definitions, I suggest you use your own terminology and define it as precisely as you can so that everyone understands what you mean by it. Re-defining established terms just muddies waters that are already pretty murky and is generally unhelpful. In a nutshell, switching from 'proper' to 'leading/lagging' and then saying all indicators are lagging except when they are mysteriously transformed into leading ones is what makes some members think you're merely trying to baffle them with quagmires of bullpoo.


Any leading indicator will be fairly effective when applied to the right market condition, namely when price oscillates in a sideways trading range. By the same token, lagging indicators will perform equally well in a market that is trending strongly. When that happens, a 'leading' indicator is prone to giving false signals and is unreliable. Needless to say, for those that wish to use indicators, the trick is to identify the market condition first, and to apply the appropriate indicator (either leading or lagging), second. Most academic studies that I've ever seen fail to do this.
Tim.
Click to expand...

I think i would agree with you on most of your comments above ......... - except with regards to your interpretation ( and others) that oscillators are leading indicators. I think for a high proportion of time and in normal market conditions - oscillators are lagging - and in some cases - extremely misleading.

I appreciate - this will open up another can of worms - as this area of discussion is just not black or white. For most of the time - I ignore oscillators - but then at certain times - mainly new quarterly or monthly highs or lows on FX pairs - they can be very effective - and then they do figure in my decision making.

The LR 2 is a better leading indicator - and i will show some charts with it being used

Regards

F
 
In my opinion there isn't a right or a wrong way. Thats too rigid, the market isn't rigid, it evolving, tick by tick. There are only wrong strategies which stem from a lack of understanding of said market.

And as regards to spot FX which I believe you're referring to. I've seen some impressive strategies on spot, involving Fibs, Elliot, MA's, etc etc and plenty of impressive youtube vids too. Tried all that, but unless you develop something yourself, your own thought processes as part of what you use, it's likely to struggle.

4hr chart, no thanks. But as you mention it, the weakness on that GU chart was apparent well before the top at (D). As much as I love trading, I'm not a slave to it anymore. 2-3 hours max a day. What's the point making money if you can't spend time enjoying life. The markets will still be there tomorrow.

Finally it's futures only for me for reasons that are not for this thread. All I'll say is once I stopped trading spot (as my focus and decision making) and concentrated purely on futures things started to click into place.
 
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I do need indicators, not many, I only use moving averages, sometimes standard deviation, because I need to know when to enter or exit a trade.
 
I guess my opinion on this matter is well known...

I just don't see any basis, any underlying theory of why an indicator, mathematically derived from a price series should have any predictive value.

Now of course, you could say "trading isn't predictive" - but you are making a bet on a future outcome and for an indicator to help you make that decision, it needs to help in the analysis process.

It's easy to get caught up in confirmation bias when looking at historical charts. Have any of the "pro indicator" guys ever compared the performance of their indicators against completely random lines?

My expectation is that random lines would work just as well as indicators.
 
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