Technical Indicators for Newbies

Discussion in 'Technical Analysis' started by Richjohns12, Jan 21, 2009.

  1. kut2k2

    kut2k2

    There are several things you should learn early on:

    (1) Almost all indicators are easy to use. But ease of use and effectiveness are two totally different things. Most indicators fail at their stated purpose.

    (2) One reason - perhaps the primary reason - why most indicators fail is that they are linear in nature. Whatever price action is, it is definitely not linear. Using a linear tool to solve a nonlinear problem is akin to forcing a square peg into a round hole.

    (3) Many people wrongly conclude that because most indicators fail, this means ALL indicators fail. This is illogical, and blinds people to the possibility of one day finding a mechanical strategy that does work.

    (4) One argument you hear from the anti-TA crowd is that indicators depend on current and past prices, and those can tell you nothing about future prices. If you think about it, this is like saying weathermen can't use past and current weather to say anything about tomorrow's weather. So all weather forecasts are based on crystal balls? I wonder what crystal balls all those "price action" people use, because it seems they also only have access to past and current data.

    (5) Keep in mind the primary reason for an indicator: to separate price signal (important movements) from price noise (unimportant movements). What's "important" must be explicitly defined upfront, or the indicator will not perform as desired. The best designed indicators will not be publicly disclosed, at least not explicitly in one place. You can piece together information from various sources but it calls for dedicated effort on your part. Learning to trade with "price action only" may be easier for most traders than doing the required research to design a mechanical system that works. It varies from person to person.
     
    #31     Feb 8, 2009