Reliability of technical indicators?

normandysr2

Junior member
11 0
Hi, so I got interested in trading a couple of months ago after being disillusioned by the "buy and hold" fantasy. Haven’t made any real trades yet but I have been “backtesting” various technical indicators (stochs, RSI, ADX DI+/DI-, moving averages, CCI, money flow etc.) and also candlesticks. To be honest the results have made me a bit sceptical. To cut the story short, I generally found there doesn’t seem to be a definitive way to achieve consistent results with technical indicators alone. Also they tend to give a lot of false signals even WITH candlestick analysis, so that was a bit discouraging.

So my question is what techniques do professional traders actually use to achieve a relatively positive profit/loss ratio greater than 2:1? Is it just all luck? Does trend analysis using no indicators really have some merit to it? Or are they simply privy to insider knowledge us retail noobs can never get access to? :confused:

I’m mainly interested in daily and weekly trading btw.

Appreciate your thoughts.
 
M

member275544

0 0
Hi, so I got interested in trading a couple of months ago after being disillusioned by the "buy and hold" fantasy. Haven’t made any real trades yet but I have been “backtesting” various technical indicators (stochs, RSI, ADX DI+/DI-, moving averages, CCI, money flow etc.) and also candlesticks. To be honest the results have made me a bit sceptical. To cut the story short, I generally found there doesn’t seem to be a definitive way to achieve consistent results with technical indicators alone. Also they tend to give a lot of false signals even WITH candlestick analysis, so that was a bit discouraging.

So my question is what techniques do professional traders actually use to achieve a relatively positive profit/loss ratio greater than 2:1? Is it just all luck? Does trend analysis using no indicators really have some merit to it? Or are they simply privy to insider knowledge us retail noobs can never get access to? :confused:

I’m mainly interested in daily and weekly trading btw.

Appreciate your thoughts.
i think you'll be surprised about the reliability of indicators
read the book, "the way of the turtle" there are indicator based strategies in there that still work today and give way better than 2:1
I have found that weekly gives even better results on these very simple strategies than daily. let me know when you get round to reading or going through the strategies and I'll tell you how you can get the results even better
 

dbphoenix

Legendary member
6,952 1,250
probably major indices and large cap stocks
My signature links to a pdf that explains an approach that is "trend-following" and uses no indicators. You'd have to apply it to whatever it is you're thinking of trading, but it shouldn't take more than a few days to find out if it will suit your needs.

Db
 

tomorton

Legendary member
8,055 1,180
When new to trading we've nearly all been attracted to the idea that a technical indicator can predict what price is going to do next.

If there was such an indicator and it was better than say 80% correct, it would be no secret and in universal use. The argument continues that when something is that effective it becomes worthwhile for the big players to take action to move prices against the crowd, and this would destroy the value of the indicator. There is likewise no evidence this reaction has occurred / is occurring on such a scale.

The only conclusion is that you can't know what price will do, only anticipate, but you must make a decision what you will do if price does X or Y. Indicators shouldn't be used to identify how likely X or Y is, but might be handy to confirm that what looks like X really is X and what looks like Y really is Y.

Anticipating price means also anticipating what you will do if what you thought was X turns into Y. No indicators help here.
 

Eric Geddes

Member
81 10
Price is the only true indicator. Use it in conjunction with DbPhoenix's straight-line clarifier and you will become a profitable trader even though not all your trades will be profitable. The only practical use I have found for any other "indicator" is to scan for a situation where Dbphoenix's strategy can come into play. It's so simple that some people won't believe it. You cannot forecast the future but you can work on probabilities.
 
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timsk

Legendary member
7,306 2,093
Hi Norman,
Welcome to T2W.
. . .To cut the story short, I generally found there doesn’t seem to be a definitive way to achieve consistent results with technical indicators alone. . .
As generalizations go, it's fair to say that technical indicators tend to get bad press here on T2W. Those that use them (and plenty do) tend to keep their head beneath the parapet for fear of getting it shot off. Most members would rather admit to to being gay than using indicators. Not that there's any correlation between the two of course!

The real problem - IMO - is not with the indicators themselves which, after all, are for the most part just mathematical calculations based on historical price movement and volume, but with the traders using them. They approach them in completely the wrong way. By that I mean they tend to go from one to the other in the hope that they'll stumble across the magical one that gives them **** on perfect entry and exit points every time. This is a fantasy - it ain't gonna happen.

So, what is the best way to use them? A good starting point is is answer this question: what information do I want/need to know that I can't easily obtain from looking at a 'naked' price chart or a level 1 screen? Needless to say, the answer to the question must not be: I want a magical indicator that gives me **** on perfect entry and exit points every time! This will at least help to narrow down the type of indicator you want to look for.

Having an indicator do a specific job that it's designed to do well and then using it for that very purpose is half the battle. The next step is to understand how it is calculated. This will give you confidence both in the indicator itself and your ability to use it correctly. Using it correctly means understanding what it's limitations are and when and why the thing it indicates may not be reliable.

So, for example, let's suppose you want to trade your chosen instrument when market volatility is above a certain level. You might choose the Average True Range (ATR) indicator and only take trades when ATR gives a reading above a predefined threshold. When I day traded U.S. stocks, I used it as a means to determine the position of my stop loss and then, in turn, my position size. It worked extremely well.

. . .So my question is what techniques do professional traders actually use to achieve a relatively positive profit/loss ratio greater than 2:1? Is it just all luck?. . .
There are any number of indicators out there and they can be used in any number of ways and in myriad of combinations. The right one(s) for you are unlikely to be the same as the ones that are right for me or anyone else. It comes down to you and your style of trading.

. . .Does trend analysis using no indicators really have some merit to it?
In a word: yes. That is to say, whether you use indicators or not - either way - trend analysis will serve you well. I've lost count of the number of members who've complained about their indicator of choice giving a false sell signal in a strong bull trend. "I went short XYZ because RSI indicated the instrument was severely overbought" they moan. Yeah, it will, and this is a good example of why it's essential to understand how the indicator is calculated, what it's indicating and why and when one needs to ignore it.

Hope that helps!
Tim.
 

DrSafari

Established member
590 36
My limited experience is that it can be helpful. Either to determine the parameters of your trade or as an extra trigger whether to take a trade or not. But following them blindly I only got bad results, this seems in line with what others here said.
 

Will Duxon

Active member
175 4
Stochastic Oscillator and Relative Strength Index

I can’t speak to its use by professional traders, but the Stochastic and RSI Combined Strategy (of which I've pasted rough copies [below] drawn using computer software) is described both as “reliable” and “somewhat reliable.” I’m in the process of trying to test my own spinoff system right now based on the settings and methodology prescribed by this approach and am anticipating some not-too-shabby results.

quick-sketches-of-the-charts-i-saw.jpg
 
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