Indicators are overhyped... The truth about them...

[TraderABC]

First of all, I have at times spent days/weeks/months backtesting various indicators from morning to evening and strategies through backtesting tool on my charting software. I have also read MANY books seen MANY videos and read a lot of indepth look at the codes behind indicators. I have also coded my own indicators. The more I read and test the more the bitter truth sets in...

What are indicators? They are nothing more than some PRICE of a currency graphed in a certain way. For example a candle is nothing more than OHLC of a certain length of tick data ploted in a visually appealing way. RSI measures the ration of up and down candles, thats IT. All these overbough/oversold rubbish is not what the indicator is showing! If you use RSI as an overbought oversold indicator than you are misapplying it. For example if lets say you have 10 up candles each 2 pips and one 100 pip candle down then RSI (11) would tell you that the currency is overbought!!! Yet it is clearly not.... Stochastic shows where the candle is closing relative to its body, if the candle is closing higher then stochastic rises and vice versa.. Yet what if the stock/equity/whatever closes to the bottom of the shadow (such as gravestone doji) yet the price rises, the stochastic could be 0 yet the price is rising!!! So much for it accurately predicting anything...

Fact: Indicators (such as RSI, roc, ma's, candles) NEVER predict, at best they show a CERTAIN aspect of price's action.

An unexpected NFP (or any other major news) data can easily disregard ANY
technical.... No technical indicator that can predict how people will feel "tomorrow at 10:45 am" or how much fresh meat will join the market today tomorrow or next year + 5 days... This applies to fundamental analysis as well...

Fact: Many indicators are almost identical, and since they ALL look at the same data you could make a case that they all are virtually identical.

Fact: In order for a market to remain a market there MUST be a seller for each buyer. There must be a person that will be willing to take an opposite side of the trade. If everyone knows that "Oh the indicator XXX says that stock is over bought/sold so I only short/long it" then that pattern will not work out.

Decades ago people used to make a KILLING using moving averages. Try that today... I automaticly backtested DOZENS of moving average combination of 3+ years of data (the max my charting software allows for short term candles) and they all bombed if spread is taken into account.

Even today the so called pros are still making a buck from indicators, by selling them.... Today with the computers and signals being fully automated anyone can use indicators thus any edge that was found in indicators is now gone. There is no need to count them by hand. Everyone can instantly see what "Triple smoothed cant fail redon stochastic XYZ" is showing. Try calculating DMI or something like that BY hand for many years worth of data. If in the old days those people who were good at math (or who had the money to hire people) did have an advantage, but today it is gone....

Too bad that the computers brought positives and well as negative changes to trading...

Any experts want to comment on this?
Sad sad truth from a knight on a quest for the Holy Grail...

[Truville]

I’m no expert, but sure, I’ll comment.

What you said is a real load.

You said: ” Fact: Many indicators are almost identical, and since they ALL look at the same data you could make a case that they all are virtually identical.

No, misapplied “fact”. Using your logic, the word for “apple” must be the same in all language, because they all mean the same thing. Is the word for apple the same in all languages?

Look, I’m not saying that ANY indicator can give you a perfect idea of what the market is about to do. If there is a Rosetta stone out there, I haven’t found it. But a perfect translation isn’t necessary to make money.

And really, I don’t think indicators are to blame. Maybe, if you fail to make money, you are using them incorrectly. I really don’t know you, but I say it’s a poor musician who blames his instrument.

[question]

There are certain classes of indicators. Be sure you're not using too many of the same type of indicators.

[MickMason]

Originally Posted by TraderABC

Even today the so called pros are still making a buck from indicators, by selling them....

Lots of statements, but not all fact.

How would something like Fibonacci fit into your 'all indicators are garbage' theory? It's been around quite a while, is public knowledge, still 'works', and I guess could be classed as a technical indicator?


Mick

[el cid]

Originally Posted by TraderABC

What are indicators? ...

Fact: Indicators (such as RSI, roc, ma's, candles) NEVER predict, at best they show a CERTAIN aspect of price's action.

Fact: Many indicators are almost identical, and since they ALL look at the same data you could make a case that they all are virtually identical.

Fact: In order for a market to remain a market there MUST be a seller for each buyer. There must be a person that will be willing to take an opposite side of the trade. If everyone knows that "Oh the indicator XXX says that stock is over bought/sold so I only short/long it" then that pattern will not work out.

Decades ago people used to make a KILLING using moving averages. Try that today... I automaticly backtested DOZENS of moving average combination of 3+ years of data (the max my charting software allows for short term candles) and they all bombed if spread is taken into account.

...

Agreed.Most indicators need to fail 20 % of the time to help a trader get into the 95% club of losers.

In trending markets most of these overbought/oversold/rsi/stochs indicators etc don't work or start to fail.


Markets become irrational and rationale/logic of indicators becomes useless.When the euro rose to 1.36 , a load of overbought indications were being thwarted at 1.28 and many traders did not join the trend at 1.28

El

[graemenash]

All depends on personal opinion. At times you can't see the price on my charts for all the indicators but that's what suits me, and works for me!


--
My Blog

[taotra]

Originally Posted by TraderABC

Fact: Indicators (such as RSI, roc, ma's, candles) NEVER predict, at best they show a CERTAIN aspect of price's action.

Most indicators were never designed to predict. Even if they were, development would be based on statistical probability. And as we all know, probability is not certainty.

Decades ago people used to make a KILLING using moving averages. Try that today... I automaticly backtested DOZENS of moving average combination of 3+ years of data (the max my charting software allows for short term candles) and they all bombed if spread is taken into account.

That's just plain false. Some people always try to argue that things change in trading. What has worked in the past, doesn't seem to work anymore, etc. The fact is, nothing changes in trading and it doesn't matter which market it is. There are only 3 directions: up, down, sideways (technically there are only 2 because if you go down to the tick level there is practically always an up or down, but that's splitting hairs), and 2 levels of volatility: high and low. These 5 factors are present in every financial market today as they were 10 years ago, or a 100 years ago in the Dow. If people made a killing decades ago using MAs then that's because the market was in a trending phase. MAs are designed to measure trend and they do that reliably and exceptionally well. If the market phase changes to one of consolidation or high volatility, MAs do poorly, but then that's expected. In that case, you use something else, like oscillators, Fibonaccis, support/resistance. If your backtests bombed it's because your 3-year data must have had a significant number of consolidation phases in it, which your model did not take into consideration.

Take a look at the daily Dow-Jones from around 1900 to today. It's basically one smooth J-curve, rising continuously from 0 to 10,000. MAs would have captured the majority of not all of that trend.

[taotra]

Originally Posted by el cid

Markets become irrational and rationale/logic of indicators becomes useless.When the euro rose to 1.36 , a load of overbought indications were being thwarted at 1.28 and many traders did not join the trend at 1.28.

Markets may act irrational, but indicators work just as well. The reason oscillators, on daily charts, failed is because the euro was in a trend from 1.23 to 1.34. Any MA would have caught that and ridden it all the way to the top.