Why technical indicators don't always work

[Neoripley]

This explanation may already have been offered but I haven't come across it yet so thought I'd share. If it's been covered and this is nothing new then I apologise, just ignore it. I was going to say if you think I'm wrong please feel free to criticise but I know you need no encouragement for that!

I haven't read anything to confirm this but my opinion is that technical indicators don't always work because they are TIME DEPENDENT. This is the only reason that makes logical sense to me. Here's why:

The charts you see in front of you are 'stretched' over a certain time frame of choice and graphically represented on an x and y axis to clarify the price action and trading sessions you choose to view. But in reality the price action only exists on a vertical axis. Price does not move forward, only up and down (like repeatedly drawing up and down with a pen on a peice of paper in the same place - eventually you will wear a hole in the paper and won't be able to distinguish one level from the other). It's stretched out simply so you can see the price levels independent from each other over time.

However, most indicators rely on this forward 'movement' (time) of prices (it's an integral part of their calculation) but it's essentially an illusion! Price does not move forward - and this is why they are not always reliable. Every indicator that has adjustable periods (which you choose to leave in default) has this weakness. An example:

Suppose that yesterdays price chart is exactly repeated today (a holy grail if ever there was one! - which of course will never happen) but just suppose - with the one exception that today it is compressed into half a day and therefore repeated twice. Did I explain that right?

Your technical indicators (if on the same settings as yesterday) will not give you the same signals today simply because of TIME - whereas all your entry/exit/target levels would be exactly the same. In fact today should be a fantastically profitable day because not only are all these levels exactly the same, but they are repeated twice! BUT - your indicators will not give you the same signals and could actually produce losses instead of twice the profit of the previous day when they worked so well.

So, in a sense, it's not really the indicators fault but rather the illusion of a correlation between time and price. Another example is when the market looks unusually choppy or volatile - if you could 'stretch' this chart out over a longer time frame, would the market look so choppy? (Then again, isn't that what volatiliy is? i.e. a lot more action over a much shorter space of time?) Anyway, I'm going off on one...

So, should you adjust (optimise) you indicators according to the price:time 'volatility' on a daily basis? If so, what is your benchmark? Or should you perhaps rely more on time-independent indicators like support/resistance and price action?

Personally, I don't use mathematical indicators for this very reason (except Williams% and perhaps RSI - but I don't rely on either).

 

[cpngtw]

I think you are confused between technical indicators and technical analysis. Remember they are same analogy as fundamental indicators & fundamental analysis...

 

[trendie]

good insight Neoripley.

are you saying the markets have a Doppler shift effect.
The same price patterns occur repeatedly, but the time over which they occur changes?

The logical conclusion would be to ditch indicators and rely on Suppport and Resistance, as the areas of action occur at a specific price-range, irrespective whether that rnage was reached after 1 day or 3 days?
thus the price point is more reliable than indicators that need time as a component, as the same indicator over 1 day will give a different signal if stretched over 3 days, but the price-point (Sup/Res) will always be truer?

EDIT: or maybe Point and Figure charts more reliable?

 

[tomorton]

Nicely illustrated Neoripley. I suppose most chartists start off with an arsenal of 5-20 indicators but only one rather poor line chart showing closes (in a sense, if you're going to trade off a closing price line chart, and that's where the indicators get their data too, you probably wouldn't see the need for a more detailed chart). But traders new to TA we should remember that indicators don't give signals, only price does that - the indicators just describe what price has already done.

 

[Vaco]

price may not move forward, but we sure do.

We get older and get charged for holding positions overnight. Therefore we require time as a component of our trading to fit in with our needs as traders.

 

[tenbobtrader]

If 90% of traders are losing money, and those traders have common beliefs with respect to the mechanics and approaches to trading, then to adopt those common beliefs for yourself is to make the conscious decision to be a loser

 

[BSD]

I think across pretty much every directional trading style most traders would benefit if they'd learn to just choose being flat in choppy conditions.

Being flat is a tool that is just as important to account health as going long or short when conditions are more favorable and hence offer better chances for your method to follow through, and not end up in a fakeout-shakeout.

A scalper getting the same signal some time after the open or during lunch shouldn't really need to think about which signal to take.

;-)

 

[tenbobtrader]

price may not move forward, but we sure do.

We get older and get charged for holding positions overnight. Therefore we require time as a component of our trading to fit in with our needs as traders.

good point



The market does not care about our needs

 

[Vaco]

good point



The market does not care about our needs

true the market is not aware of our needs, but the market is not analysing us we are analysing the market.

if price is a t support and a low risk entry is possible but it will take 3 months to reach the target at resistance it is not a viable trade to a short term trader as it will tie up valuable capital that could be used else where.

The market does not care but we sure do so therefore time is an important component of our trading.

 

[bbmac]

These tech indicators don't work threads are tiresome and the reasons given flawed,...it's a simple truth that some have found a way of making money by having tech indicators into their overall tech analysis mix. As an example,...for me certain repeating patterns (regardless of what day it is!!) form part of my trigger for entry (confimred by price action,) and used in the right way as part of an overall confluence of reasons to enter the market, that make up my trading edge and indicate/pinpoint the most optimum entry points that are very high in probability of a successful outcome.

Those that say that they do not work are beiung too simplistic both in their analysis and the absoluteness of such a statement.

 

[tenbobtrader]

YouTube - David Bowie - Time

 

[BSD]

BBmac, very good point.

If we want to keep this in the realm of the provable Don Miller earned some what 2 mill dollars last year using indicators. Linda Raschke uses em. Japanese professionals at banks and hedge funds wouldn't be without their Ichimoku. Ed Seykota got filthy rich using indicators. Grey1 here used his CCI's to capture cycles and did so publicly with great success on several occasions. Etc etc.

I appreciate the purists using nothing than price action.

But it's simply a fact that there are far too many highly successful people out there trading very profitably and using indicators for the entire concept to be debunked.

My take is it works as long as it works.

I honestly believe pretty much anything can work as long as you learn how to stay away from choppy periods entirely, and during periods of strength be very quick at cutting your losers, while riding your winners.

Nothing new there admittedly, but it doesn't have to be does it.

 

[bbmac]

These tech indicators don't work threads are tiresome and the reasons given flawed,...it's a simple truth that some have found a way of making money by having tech indicators into their overall tech analysis mix. As an example,...for me certain repeating patterns (regardless of what day it is!!) form part of my trigger for entry (confimred by price action,) and used in the right way as part of an overall confluence of reasons to enter the market, that make up my trading edge and indicate/pinpoint the most optimum entry points that are very high in probability of a successful outcome.

Those that say that they do not work are beiung too simplistic both in their analysis and the absoluteness of such a statement.

As a very recent example of how indicators can be useful; how many went long at point a in gbpusd a few moments ago?? the only potential support I could identify was the Wkly M3 calcultaed pivot (minor reason) and the topside of the breeched previous 4hr descending resistance trend line joining highs on 30/6 7 16/7. Not much then in the way of potential support but with the confluence of an indicator based set-up (repeating high probability pattern) in this case what i call a reversal Extreme, there was a high probability entry for +30+ pip gain off the 1min trigger on close of the first reversal candle.

Similarly at point b, another repeating apttern this time What I call a Re-entry type 4 confirmed by a price action trigger gave an entry for pip gain. This was perhaps a more obvious trading opp than that at point a, as it was at clear potential sbr of the previous 5min congestion and 1hr/4hr swing lo but the confluence of the again 1min indicator set-up adds to the confluence of tech reasons indicating a hi-probability traading opp.

 

[BSD]

Yup.

I remember following your setup in the past.

And your longevity in trading is more than enough proof by itself to vouch for you and your method.

One theorise all one wants all day long, but at the end of the day it's only about results.

Marty Schwartz who was also in Market Wizards wrote an excellent book himself as well, Pit Bull, and he uses indicators too to achieve returns of on average 30% per month ! Audited, too.

Non-compounding, but still outstanding.

Moving average for higher time frame trend, oscillator for trading time frame counter trend exhaustion, waiting for lower time frame to emerge from it's pullback and to realign with the direction of the higher time frames trend.

KISS at its best, and highly profitable.

A method that's aligned with the natural ebb and flow of markets, that's been around for ages, and will always work because it just captures the normal way of how markets move, in cycles.

 

[BSD]

See how far back this basic strategy goes that Marty Schwrtz for one got to work for himself using indicators:

Buy the dips, sell the rips

There are so many good trading blogs out there at the moment, including one by a guy who posted real time results of his fellow members at a US prop firm, and to be honest all of their screens have at least one moving average and an oscillator on em.

 

[raysor]

they are TIME DEPENDENT.

Point & figure?

 

[bbmac]

Yup.

I remember following your setup in the past.

And your longevity in trading is more than enough proof by itself to vouch for you and your method.

One theorise all one wants all day long, but at the end of the day it's only about results.

Marty Schwartz who was also in Market Wizards wrote an excellent book himself as well, Pit Bull, and he uses indicators too to achieve returns of on average 30% per month ! Audited, too.

Non-compounding, but still outstanding.

Moving average for higher time frame trend, oscillator for trading time frame counter trend exhaustion, waiting for lower time frame to emerge from it's pullback and to realign with the direction of the higher time frames trend.

KISS at its best, and highly profitable.

A method that's been around forever.

Agree with you comments (thx) It's just a question of applying them sensibly. Pattrens repeat in all aspects of life not just trading so if you can identify repeating patterns @ pre-identified potential supp/res/sbr/rbs with an individual price action trigger, you have a high probability trading edge that when combined with the right r:r and money management can be profitable over the longe term.

The screenshots below are the weekly and monthly chart patterns that I identified at the current yearly low 3505. There was a repeating pattern down to the 1min chart at that low, and they set-up across all time frames to the monthly chart. The confluence of such repeating patterns on t/f's above your own trigger t/f add to the confluence of the overall set-up and can indicate a good target is achievable. In this case what I call a Reversal B on the weekly with a Reversal Extreme supporting set-up on the higher monthly t/f, with the individual price action trigger at point a if using the weekly as a trigger.

Confluence is where the highest probability trading opportunities live and tech indicator based patterns can form a very useful part of this confluence both on the trigger and supporting the entry if on t/f's above the trigger.

 

[Rossini]

If you feel the main reason why indicators are not consistent is because of time/volatility, then indicators calculated on a tick chart would go a long way to solve this problem??

 

[VingTsunKuen]

...it's a simple truth that some have found a way of making money by having tech indicators into their overall tech analysis mix...

Hear,hear BB...
Crucial fact about those people is that they have come up with set of rules which have stood test of time.I think that you,BB,have your rules and you live and die by them when it comes to trading.It is pointless to discuss do indicators do tha trick or not.They do tha trick for guys which know what they are doing and do not tha trick for those who do not know what they are doing.
After all,whole trading is about that..Those which know how to trade are paid from those who do not know how to trade.
Whole other thing is personal preference..
When i see those BB"s attachments i get dizzy!
All those lines and indicators are just too much for me and that is not mine cup of tea.
So the point is so obvious.One must know to use certain tool properly to make it work.

Regards,
VTK

 

[BSD]

BBmac, that again makes sense, when everything is aligned on several time frames and you have several supporting factors you can really load up and have greater confidence in the trade. Doesn't Trader Dante look for confluence as well.

Grey1 went through his CCI settings on several time frames as well generally.

Must admit I tend to keep it somewhat more basic, I generally just stick to my setup which is also basically buying pullbacks in an established trend, trying to capture a part of the waves markets constantly make, and then just stay away when chop sets in around noon or news / numbers come out etc.

(Which means one is done already for the day after the "open" in these times more often than not ?!?!)

;-)

Basically everyone is either a trend follower or trades reversals to the mean.

No other way to make money as a directional trader is there at the end of the day.

Seems like I do the former, and you the latter.

But then I'm a lazy guy and going along with the flow, merely following the path of least resistance suits my philosophy on life and the workings of the universe far more anyway.



Eg, where you went long cable, your probable exit would have been around where I would have started looking at a short. (Didn't take it tho as I'm typing on boards instead of doing what I should be doing, trading hmm. (But trend / pullback etc also identified by me with some moving averages and oscillators tho along with price action, ie lower lows - lower highs in this example.))

I'm just a visual guy and the slope of a moving average - I obviously don't do crossovers - is just a quick tool to gauge whats going on.

Couldn't one see an up or downtrend without a MA ?

Sure.

But couldn't you drive from Berlin to London without a navigation system too ?

Or, once arrived, park your car without a reversing camera or parking beepers ?

;-)