For Newbies: Why Indicators Don't Work

[Wicked_Daddy]

Maybe this will enlighten experienced traders as well but I think most experienced traders have probably figured out this indicator flaw...

Indicators seem so magical when looking at them in confluence with the historical price action on a chart. They seem to predict or at least indicate in unison what the price is going to do or is doing. Isn't it amazing how the MACD crosses over almost exactly at the point price turns and goes in the same direction? The Stochastic seems to turn on a dime as the chart does the same thing.

Then why does it seem that every time you enter the trade on the cross or direction change, you're too late and ultimately stopped out? Notice this with other indicators as well?

It has been said many times that indicators lag price and this is true. But there is an often overlooked property of indicators that is actually pretty simple to understand once recognized: The angle of the lines of the indicator are influenced by the price action multiple periods FORWARD in time. This is why they work perfectly in a historical view but are difficult to gauge in real time.

Imagine a steep and sudden downtrend from a high point. Before that reversal happened, just about any traditional indicator would appear to be traveling upward with the price. The turnover doesn't only lag price, it takes time to paint the downward slope as the price declines. Depending on the underlying data, it may even appear to indicate a continuation of the upward price action while real time price is already descending.

But looking back on it, you would see how the indicator did it's job and you're left scratching your head, wondering how you missed that.

Indicators are not all bad. I use them to confirm the strength of my trade once I'm in it, to determine how much longer I want to allow price to run. But I still use discretion. I don't rely entirely on the indicator and plotting them across 3 time frames is also a good idea so you can view the behavior in short and longer term behavior.

Just a thought for the new trader... I had to figure this out on my own years ago and the lesson wasn't free.

All the best!

 

[malaguti]

You say indicators lag, but if you plot an hourly chart, didn't you have to wait an hour?
If you have a breakout strategy you'll find your traditonal macd gives you signals well ahead of your breakout. So you'll find they don't lag as much as you think they do, in fact are ahead of your entry point.
take the attached chart..the breakout points are colour coded blue, yet two great macd signal well ahead of your breakouts.
We're often conditioned to accept what others say. Indicators lag blah blah blah. what we don't actually do is question, we just accept it and then write off perfectly good indications.
its how you use the indicator, not the indicator itself
perfectly good profitable systems can be written from your most basic indicators that have been around since charts began

 

[spinola]

Price is also an indicator. And guess what ? That lags....but like other indicators , it can INDICATE , COMMUNICATE,

shhhh, listen , bubbs. Do you hear that ? The whispering winds of shjt ! There's a shjt storm a coming, but ya picked the wrong side....

:cheesy:

 

[Wicked_Daddy]

I agree that indicators can be used effectively. This is why I posted this tip in regards to reading them incorrectly based on trusting how the history looks. And I think I had said in a post elsewhere exactly as you have said: It's not the indicator, it's how you use it.

Below is an example of what I'm saying. I had to take two snapshots to illustrate what happened after the MACD signaled a trend change upward. Historically, it makes sense to see the sudden change downward. But that would not bee seen until it actually happened.

 

[verial]

How is this even a topic.

The facts:

1. If you are using a made-up indicator with no statistical backing, yes, it's as good as a coin flip.

2. If you are using indicators with actual research behind them and apply the to the right market, they work for you and allow you to beat the market.

3. If you're using indicators that work but applying them to the wrong market, your indicators won't work (e.g., candlestick patterns applied to day trading).

I only started beating the market by a significant margin after developing a indicator-based system. Are you calling me (and my students) lucky?

 

[spinola]

If they dont work, that must mean take the trade in the opposite direction, nes pa ?

 

[Wicked_Daddy]

If they dont work, that must mean take the trade in the opposite direction, nes pa ?

More times than not, that has worked in my favor. I should qualify that by saying that I am an intra-day trader.

 

[Wicked_Daddy]

How is this even a topic.

The facts:

1. If you are using a made-up indicator with no statistical backing, yes, it's as good as a coin flip.

2. If you are using indicators with actual research behind them and apply the to the right market, they work for you and allow you to beat the market.

3. If you're using indicators that work but applying them to the wrong market, your indicators won't work (e.g., candlestick patterns applied to day trading).

I only started beating the market by a significant margin after developing a indicator-based system. Are you calling me (and my students) lucky?

I read your gap/options thread. Well done and good luck with your newsletter. To each their own... I only started beating the market when I stopped relying heavily on the standard, proven indicators. I still use them but with A LOT of discretion.

To your point, I suppose this is not a worthy topic, although it's been argued exhaustively in this forum. Honestly, I don't know what I was thinking. So to that extent, I'm not posting any further in this thread. The topic only invites more argument and there is no point in that.

My bad.

 

[morgan_edge]

I don't really use indicators. Best trader on the forum is Jessie_trader and he seems to use indicators to some extent, so I guess there's more than one way to skin a cat.

 

[timsk]

. . . To your point, I suppose this is not a worthy topic, although it's been argued exhaustively in this forum. Honestly, I don't know what I was thinking. So to that extent, I'm not posting any further in this thread. The topic only invites more argument and there is no point in that.

My bad.

Whoa @Wicked_Daddy - stop beating yourself up so much!

It's a perfectly valid thread. Ditto for the points you make in your OP, which you explain very eloquently and comprehensively. Yes, indicators have been debated exhaustively in this forum before, but so too has pretty well every other aspect of trading. There's no harm (and potentially a lot of merit) in raising the topic again as new members offer fresh insights or express old ones in a different way. I'd say you've done the latter very well.

Indicators always arouse strong feelings in members, but remember this is a discussion forum so it's to everyone's benefit if different views are expressed. It's a very worthy thread/topic. As to what you were thinking when you started it, I don't know either, but I'm glad you did and I hope you continue to post your views.

Tim.

 

[tokyojoe]

Agreed, this is a perfectly valid topic, indicators are traditionally one of the main tools for most beginners & help you get a feel for the way price moves, but that is it.

Having learned their use & limitations, they do end up telling the you same thing & do tend to take your eye off the ball, I've phased them out.

There is a good argument for people who have gone to the next level & developed their own indicators for their own use, hats off to that.

 

[barjon]

Searching for what "works" is a fruitless exercise. Trading is about making assumptions, taking what you need when that assumption pans out and minimising the damage when it doesn't.

 

[Wicked_Daddy]

Thanks Tim. I will continue to post but I think I'll attempt to keep them as objective as possible. I don't want to invite or add to the bashing that I read so often.

 

[malaguti]

To your point, I suppose this is not a worthy topic, although it's been argued exhaustively in this forum. Honestly, I don't know what I was thinking. So to that extent, I'm not posting any further in this thread. The topic only invites more argument and there is no point in that.

I agree with Tim, the topic is a good one. But your title is very misleading. If you think that indicators can work, then its odd that you would call out to all newbies, that they don't.
As almost everyone here has stated, actually they do. I've also shown how actually they don't lag, no more that price itself does.
Unfortunately too many seem to suggest that no indicators are needed, just price. How you need to understand emotions of traders, how you need to understand who is on the other side. Garbage that they've probably read somewhere and never took the time to understand.
Newbies could learn so much if there was just a way to filter out the noise, such as the title of the thread, albeit a good one

 

[timsk]

. . . your title is very misleading. If you think that indicators can work, then its odd that you would call out to all newbies, that they don't.

Interestingly (to me), this was exactly my initial response. When I saw the thread title, my heart sank a little as I thought: 'ere we go, another member who's had a bad experience with indicators, doesn't understand when or how to use them etc. and is righting off the whole lot (and there's a lot) - as all being useless. So, when I read the content of your OP Wicked_Daddy - I was pleasantly surprised. With the benefit of 20:20 vision, perhaps a more fitting thread title might have been along the lines of 'Problems that Newbies Need to be Aware of when Using Indicators'. Not very succinct or punchy, but perhaps is a better summary of the main thesis presented in your OP. Still, as malaguti rightly says, the existing thread title is good one, and anyone taking the time to read the posts so far will be rewarded with a broad mix of views about the pros and cons of using indicators.

So, all is good - as is the thread - more please!

 

[verial]

I read your gap/options thread. Well done and good luck with your newsletter. To each their own... I only started beating the market when I stopped relying heavily on the standard, proven indicators. I still use them but with A LOT of discretion.

To your point, I suppose this is not a worthy topic, although it's been argued exhaustively in this forum. Honestly, I don't know what I was thinking. So to that extent, I'm not posting any further in this thread. The topic only invites more argument and there is no point in that.

My bad.

You seem like a genuine person. The fact that you've used indicators before trashing them means that you're legit. My only question would be how you chose those indicators.

I think too many people hear of indicators and start using them without performing any research. One should always look into the statistics behind each indicator and what market(s) those indicators are based upon. Without solid facts, no indicator is worth anything.

Now it's your turn: What's the alternative to indicators? Intuition? News? Gossip?

 

[Wicked_Daddy]

You seem like a genuine person. The fact that you've used indicators before trashing them means that you're legit. My only question would be how you chose those indicators.

I think too many people hear of indicators and start using them without performing any research. One should always look into the statistics behind each indicator and what market(s) those indicators are based upon. Without solid facts, no indicator is worth anything.

Now it's your turn: What's the alternative to indicators? Intuition? News? Gossip?

OK, discussion continues. And thanks to everyone for the positive votes. I agree that the title I chose is too strong for the intended content. It's not that indicators don't work. They neither work nor don't work - they only indicate what has happened and provide historical insight on the probability of what could happen. I think the key word in my title is the "Why" as to why they are often misunderstood, giving the impression that they don't work. Many traders don't read them correctly in the present because the past indications are skewed by what happened after a purposeful indication was made. It was basically a word of caution based on my discovery at some point while I was manually back-testing some chosen indicators and found the results of too many strong indications to be false in the short term. I'm a short term trader so this was a problem.

It has been pointed out in this discussion the higher time frame benefits of an indicator's use and I agree. I do use MACD, Stochastic and RSI on a regular basis, among others. For the most part, to determine the strength of an overall trend so that I short term trade in the proper direction. I take small bites, use tiny stops and seek to make immediate pips in minutes. Entering a trade and then watching it reverse even a few pips drives me bananas. So I make every effort to make sure I have momentum at my back. Respecting a steeply divergent MACD or a Stochastic in the middle of the range with a steep curve helps me do that. Using them in tandem adds a degree of confidence. I recognize that I am an emotional trader. I loathe negative numbers in the trade. So long term doesn't work for me, although I'm really trying to overcome that because I'd like to trade less and goof off more.

An alternative to indicators? I've certainly modified indicators to see if I can get them to fit short time frames better but that just creates more noise. It reminds of a phrase I learned in another life as a sound and recording engineer: "The more toys, the more noise". Very true. I don't think there is an alternative but I would say that less is more. Like most traders in their early discovery phase of their trading careers, I piled them on in an attempt to create a mistake proof entry/exit strategy. I missed so many opportunities trying to figure out what to do. I literally trapped myself in an indicator prison. That's funny to me now.

Intuition, news and gossip are all important factors too. News and gossip can beat up an indicator in a moment's notice. Perhaps in the long term, not so much. But when trading short runs, grabbing 5-10 pips, a sudden explosion due to a blurb that hits the news wire can either crash my trade or send me merrily to the bank. As I have matured as trader, I find intuition plays a role more and more as well.

To close, it's ALL important. As traders, I believe we learn to elevate our power of concentration to a level that non-traders probably could not understand but athletes and snipers would. I found that is the true challenge of trading; finding your zen. There is a lot to consider when setting up and ultimately entering and even more so (IMO) when exiting. Indicators, when understood and used with discretion can help with those decisions.

As a side note, I know my posts have a tendency to be long. I'm finding that posting here takes my mind off my current trade as I fight to take a longer term approach. At his moment I have been in the EU with a short since 0830 CST at 1.1224 and it's doing very well. Typing this has kept me from staring at it the whole time with my finger on the trigger to exit. It's at 1.1192 and that looks good to me - more pips than I usually take in a single trade. So thanks to all for the therapy!

 

[Jason101]

I think some do work. I find ATR very useful.

 

[Fugazsy]

Price is also an indicator. And guess what ? That lags....but like other indicators , it can INDICATE , COMMUNICATE,

shhhh, listen , bubbs. Do you hear that ? The whispering winds of shjt ! There's a shjt storm a coming, but ya picked the wrong side....

:cheesy:

lol.

so true.