Too many indicators

[socrates]

Hi

I would like to pass on something I read on "Stockcharts" the other day regarding the use of too many Multicollinearity indicators.

I quote from their website:

Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. Analysts need to be careful and not utilize technical indicators that reveal the same type of information.

Here is how John Bollinger states it: “A cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.”

The issue of multicollinearity is a serious issue in technical analysis when your money is at stake. It is a problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they really are. One of the real problems is that sometimes multicollinearity is difficult to spot.

Technical indicators should be arranged in categories to keep from using too many from the same category.
End quote

Take a look at their website:

http://stockcharts.com/education/Tra...linearity.html

[TraderJuan]

Originally Posted by socrates

Hi

I would like to pass on something I read on "Stockcharts" the other day regarding the use of too many Multicollinearity indicators.

I quote from their website:

Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. Analysts need to be careful and not utilize technical indicators that reveal the same type of information.

Here is how John Bollinger states it: “A cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.”

The issue of multicollinearity is a serious issue in technical analysis when your money is at stake. It is a problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they really are. One of the real problems is that sometimes multicollinearity is difficult to spot.

Technical indicators should be arranged in categories to keep from using too many from the same category.
End quote

Take a look at their website:

http://stockcharts.com/education/Tra...linearity.html

Great post, something that I had not thought of.

[yasirdxb]

The other side of this problem is, what would have happen if one uses indicators

that reveals different type of informations.. he would end up in not taking the

trade.most of the times both of the indicators wont agree, if you are using

indicators from diffrent categories.

IMHO, one should choose indicators according to his trading style. I dont think

choosing indicators from different categories will do any good!

Yasir.

[elmagd2000]

This is might be of use:

http://www.moneytec.com/forums/showt...categorization

[TraderABC]

Originally Posted by socrates

Hi

I would like to pass on something I read on "Stockcharts" the other day regarding the use of too many Multicollinearity indicators.

I quote from their website:

Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. Analysts need to be careful and not utilize technical indicators that reveal the same type of information.

Here is how John Bollinger states it: “A cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.”

The issue of multicollinearity is a serious issue in technical analysis when your money is at stake. It is a problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they really are. One of the real problems is that sometimes multicollinearity is difficult to spot.

Technical indicators should be arranged in categories to keep from using too many from the same category.
End quote

Take a look at their website:

http://stockcharts.com/education/Tra...linearity.html

That is a great post. I've discovered that for myself as well. Put many oscillators on the same chart and you'll see that they are almost identical!!!
Momentum, ROC, WLR, RSI, Stochastic, etc they may differ slightly in how the show their information, but they are wayyy to similiar to each other.


2nd if you think deeply into the link and think more, then you'll realise that it tells you to avoid using multiple indicators. Why? Because all indicators are looking at the same thing, PRICE so even using two indicators becomes redundant... Unfortunately indicators don't predict the future and provide no additional information about the market, but they DO filter out a lot of information...

[dentist007]

Originally Posted by socrates

Hi

I would like to pass on something I read on "Stockcharts" the other day regarding the use of too many Multicollinearity indicators.

I quote from their website:

Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. Analysts need to be careful and not utilize technical indicators that reveal the same type of information.

Here is how John Bollinger states it: “A cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.”

The issue of multicollinearity is a serious issue in technical analysis when your money is at stake. It is a problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they really are. One of the real problems is that sometimes multicollinearity is difficult to spot.

Technical indicators should be arranged in categories to keep from using too many from the same category.
End quote

Take a look at their website:

http://stockcharts.com/education/Tra...linearity.html

great posting.some systems that have been posted are getting too complicated and there seems to be a lot of replication with indecators.i think the main theme is to have one of each type of indecator for a trending market and one of each type for a ranging market.no more.obviously different ones for each type of market

[socrates]

Hi

I am glad that some of you have found this posting helpful.

In essence, I think it boils down to the fact that certain groups of indicators may be collecting similar information for use in their "charting".

As such I think (IMHO) it would be unwise to employ them together as a sole means of entering a trade.

[acronym]

Just came across this thread, very interesting. My usual template, i use three macd's, for the very reason they do all tell me the same thing- just on different time frames. And long term guppy's, which show the same thing as the 18-44 macd, but help establish true divergence for trending.
Which is strange-if there all telling me the same thing, how can the brain misinterpret it, and screw up the trade?