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

[zupcon]

Hi TraderABC, I certainly don't consider myself an expert, but I've spent a year or so full time studying technical analysis, building indicators, crunching numbers. I agree with most of what you say but I perhaps draw a very different conclusion.

Like you I asked the same basic questions “What is this indicator telling me”, “how is it constructed”, “what happens if i feed it statistical outliers”, “under what conditions does it work or not work”.

I agree, indicators show price, rate of change of price, acceleration, volatility etc. etc. all derived from price. However each of these views all adds to the bigger picture. Personally I think indicators simply help us recognise patterns more easily.

I honestly don't know why anyone should think an indicator can “predict” price, could someone please show me one website, or one document written by any credible author who claims that an indicator is able to predict anything.

You make a good point regarding Multi collinearity in indicators, sure stick a bunch of oscillators on a chart and they do tend to say the same thing, no surprises there at all. Sure oscillators saturate in trends etc etc

You say that an unexpected NFP can result in moves contrary to technical analysis, sure that's why people generally advise against trading around important news events.

I think your probably drawing a very dangerous conclusion, you seam to be saying that because indicators don't work for YOU, they don't work for anyone. I really don't think you should be at all despondent or discouraged, most of your observations are correct, and its clear that your now starting to use indicators with a degree of discretion and skill and that's a positive step forward in your trading.

It comes down to probabilities, and indicators give an edge, not a 100%guarentee.

mick

[el cid]

Originally Posted by zupcon

It comes down to probabilities, and indicators give an edge, not a 100%guarentee.

mick

That edge often results in huge losses when they fail.

Recently A trader recently looked at indicators and trends and put a highly geared trade on GBP /CHF to go up .Three hours later the Bank of England minutes were published and the GBP went down in a straight line probably writing off the last two months profits and more.

What it proves is indicators are about the past and present , and all factors remaing same give a high probability of success in the future.

They don't tell you the important thing , that matters ie the future

El

[GBPKING]

I do believe indicators are like the trade map. I canot find my way north or south with out it.


You just need to find the right map for your trip.

[zupcon]

Originally Posted by el cid

That edge often results in huge losses when they fail.

Recently A trader recently looked at indicators and trends and put a highly geared trade on GBP /CHF to go up .Three hours later the Bank of England minutes were published and the GBP went down in a straight line probably writing off the last two months profits and more.

What it proves is indicators are about the past and present , and all factors remaing same give a high probability of success in the future.

They don't tell you the important thing , that matters ie the future

El

Anyone sustaining huge losses is using inappropriate money management, and quite frankly gets whatever they deserve. By the same argument the inappropriate gearing that resulted in huge losses would of course result in huge gains if the call had been correct.

And again who ever said that indicators predicted the future ?

[taotra]

Originally Posted by TraderABC

If markets are irrational then rational indicators (or whatever) would not work well.

To be correct, markets by themselves are not irrational. We, as traders, define markets as acting irrational when price action goes against our expectations. For example, when price moves in the opposite direction from what we expect following the release of economic news. Therefore, indicators work just as well.

Of course oscillator fail when the market is trending, the question is when does the market start and end to trend? By the time you find out, you may be too late to take significant profits.

The right indicators with the right settings will give you plenty of time.

[taotra]

Originally Posted by TraderABC

Here is a pic showing some oscillators side by side. Notice how similiar they are to each other. They are almost identical even if taken using different parameters... Some are smoother some are more edgy, some show more detail, some less, but its all one ***.

Well, that is how it's supposed to be. If you know statistics, you know that any indicator development is based on 2 constructs: validity (how well does the indicator measure what it is intended to measure, in this case price action) and reliability (how consistently does it measure what it is supposed to measure). So in your example, for the oscillators to be valid and reliable they should all peak (overbought) when price peaks and trough (oversold) when price bottoms, and do so consistently over time. And it appears that they do. Hence you would expect them to be correlated, but it's not guaranteed. It depends on what variables were used in the construction of the indicator. The ideal situation would be to have low multicollinearity among the indicators and high individual and multiple (combined set) correlations with price action. My suggestion, pick one oscillator you feel most comfortable with.

[taotra]

Originally Posted by TraderABC

Have you seen currency charts ~30 years ago? You see a huge difference. See the attached pic below.

I believe your chart shows flawed data. If I remember correctly that particular software and datafeed you're using, which is free, has the problem of showing data with small candles and extremely long wicks until 2001. It's highly unlikely that EURCHF moved about 500 pips every week only to close essentially where it opened. Data form my provider unfortunately is of no help because older candle data doesn't have any wicks.

I politely disagree. First of all price goes in 2 direction...

Didn't I say that?

2nd Volatility (and price behaviour) changes and that DOES change a lot.

You misunderstood. What I said, was the factors that make up the market: up and down movement, high and low volatility, never change. Of course, those components alternate constantly.

For example I used to have an excellent strategy with reverse stops that totally rocked. Very quickly afterwards the market changed and the strategy bombed.... If market does not change than many strategies will work equally well, empericly I've found that not to be the case. Setting a small risk to reward ratio can be good in a non-volitile market, but in more volatile markets the whipsaws would saw you to death....

As I said, of course the market changes, but only within those parameters outlined above. It doesn't create something outside of that framework, like reversing in time or price going negative. If your strategy bombs because the market changes from low volatility to high volatility for example, it just means that your testing model did not include a component that is able to handle that change.

[MickMason]

Originally Posted by el cid

probably writing off the last two months profits and more.


They don't tell you the important thing , that matters ie the future

El

Writing off 'two months profit and more' on one trade probably means the trader needs to look more at limiting risk instead of indicators!

No, indicators don't tell the future, but then what does?

Mick