Why technical indicators don't always work

Neoripley

Active member
131 7
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).
 
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cpngtw

Experienced member
1,525 18
I think you are confused between technical indicators and technical analysis. Remember they are same analogy as fundamental indicators & fundamental analysis...
 

trendie

Legendary member
6,232 1,007
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?
 
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tomorton

Legendary member
7,428 1,000
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

Senior member
2,134 269
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

Guest
450 140
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
 
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BSD

Veteren member
3,819 984
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

Guest
450 140
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

Senior member
2,134 269
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

Veteren member
3,584 787
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.
 
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BSD

Veteren member
3,819 984
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.
 
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bbmac

Veteren member
3,584 787
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

Veteren member
3,819 984
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.

:)
 
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BSD

Veteren member
3,819 984
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.
 

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