Indicators are Liars! Building a Real Edge

Discussion in 'Trading' started by Pivotfarm, Nov 17, 2010.

  1. Pivotfarm

    Pivotfarm ET Sponsor

    Hi everyone

    Some of you that have been around a while may recall a thread by the same name a while ago. Well now its back! Great to be back where Pivotfarm organically first started. :)

    After giving it a lot of thought I have decided to become an ET sponsor, have to admit I was hesitant at first, as I have seen in the past sponsors getting absolutely gunned down, sometimes for good reason and other times just because a troll felt like being a jerk.

    I hope I can bring to the table some ideas, approaches and techniques that are common sense and offer value to all the traders that frequent this message board.

    So let’s get going…Indicators are Liars!

    This statement in the past has evoked emotion driven responses from traders who sit on both sides of the fence. As a whole most traders believe that using indicators offers an edge in trading. To be frank I don’t disagree, what really gets on my nerves are misled traders that RELY on indicators as a CORE reason for a trade. You know what I mean, taking a short because the Stochastics is crossing to the short side, without any regard for price action or where the market is. Traders simply overuse, misuse, abuse and get confused by Indicators; they are not the Holy Grail!

    Get back to basics! Build your core in the fundamental elements of being a trader.

    What does this mean? I believe that a good trader feels it is his duty to be prepared for the trading day, to do his homework, to have a plan and importantly identify the key areas where he wants to do business ahead of time. This preparation combined with support and resistance technical analysis should I believe be the CORE of your method.

    Where do indicators fit into this? So you have identified key areas where you want to do business, you then use indicators to confirm a trade, looking for divergence, extremes, crossovers or whatever it is. This sounds very simple I know, but not focusing on key “business areas” is what leads most traders to the demons of that itchy over trading finger, a lack of focus and the inevitable psychological minefield.

    In this thread I hope to run through analysis methodologies, share with traders how an approach based upon Technical Confluence (combining multiple S/R methods (volume profile, Elliott, wave, Market Profile etc) and through statistical analysis with back/forward testing can help traders adapt and evolve with changing market and inter-market variants no matter what system they are using right now.

    So how do you prepare for your trading day? What are your rituals? What prep work do you do?
     
  2. xburbx

    xburbx

    Checking in. GL PF
     
  3. For a year i was using indicators and i was pissed off with indicators as nothing worked consistently. All indicators are mechanical/automatic approach to trading.

    On Oct 1, 2010, i decided i will start to write a journal recording how price behaved in the specific Asian future market which i trade and follow- I started to write where price opened, where it hit high, where low, where it closed.

    I understood, memorized and revised each trading day hundred of times. After few days of recording and observing price action, the neurons and synapses inside my brain started to understand the collective psychology.

    I started to take each trading as a practice case study/simulation study. Nurses, Pilots, Doctors, MBAs all go through extensive simulation practice.

    Trading is a collective psychology. The price reflects what 'everyone in the market on an aggregate basis is doing'.

    Trading is not about my indicators, my theory, my approach, my idea, my belief, my sense, my commonsense.. Trading is collective.

    Since Oct 1, 2010 I have recorded 41 trading days and each and every trading day price action is on my tips. My brain neurons are getting strengthened. They are able to understand why price behave how it behaves.

    Uncertainity still remains as no one have any idea where price will make top and bottom but best traders in world have accepted these uncertainities as cold reality of trading.

    I will not use any indicators to solve uncertainity. I will embrace and manage uncertainity.

    Technical indicators are byproduct of higher computer processing power after 1980s.
     
  4. A lot of techies have no clue what an indicator might be telling them. For example, a short term simple moving average may be turning down because the early big up days are being removed from the calculation rather than from the new days being added. Stochastic (and other indicators) are also affected by the same process.

    This conclusion may seem obvious but when you get into more complex indicators, the deceptiveness gets more clever. Many love the MACD but some don't know that a turn up below zero (or turn down from above) can also be a false signal because of the aforementioned SMA calculation.

    Tho it took me quite a few years leave investing and start trading, my intro was 20+ years ago when a successful mentor used a pair of linked computers for trading futures. One was for analysis and the other for collecting and collating tick by tick data. I didn't go in that direction but I remember one of his mantras: Always refer to the price domain - indicators can be deceptive.

    And no, I don't use any of them :)
     
  5. The great irony of trading is that it is difficult precisely because it is so very simple.

    Trading has become a billions of dollars scam industry.

    One guy is now using astrology to predict the future price movements.
     
  6. I use an indicator to get me out of the trade
     
  7. Pivotfarm

    Pivotfarm ET Sponsor

    Great Post. With some good ideas and statements! My favourite being "I will not use any indicators to solve uncertainity. I will embrace and manage uncertainty." I agree in many ways with your statement, but also feel that the controlled and focused usage of indicators can help traders add probability to their edge. Trading is simply the management of uncertainty, uncertainty is probability and your success in trading is defined by your analysis and exploitation of those probabilities.

    Don't know if you have come across a book called Outliers by Malcolm Gladwell? In it he talks about the 10,000 hour rule, how any cognitively complex vocation (doctor, engineer, lawyer etc) requires on average around 10,000 hours of study, practice and focus. The attitude held by a lot of newer traders is that trading is a get rich quick scheme. That within a few weeks on the sim you will be turning $500 in a million!

    Given that trading with its mountain of psychology and method IS a cognitively complex vocation, 10,000 hours equates to around 3-5 years at 6-8 hours of study a day. Sound very reasonable considering the benefits trading offers with success.
     
  8. Superb post..Thank you for sharing it with us.

    Yes i know that book by Malcolm..i have not read it but he is bang on target with 10,000 hours rule.

    Every year, there are about approx 240 trading days. So ,3-5 years of study will expose a trader to about 720-1200 patterns and through active learning process brain internalizes those patterns and try to find out meaningful trading ideas.