Indicator or Indicatorless

This started from yesterday when I was proudly showing my Adjusted TRIN and Buyer/Seller Index to my fiancee, because I thought it was so cool. Well, I guess the colored lines on the chart were meaningless to her. She said :” When you first started dummy trading, you were trying to get rid of these indicators, now why are you messing up the chart again?” ah well…

I am not a big fan of technical indicator. In fact, I can’t even understand and apply Stochastics properly (maybe, i just did not put enough time in this area)

I have always heard or read about, “Follow the price action is enough”, or “Indicators are useless” from anonymous traders who sound like pro (or pretend to be one) blah blah blah. To a certain extend, I agree with them. You can’t rely on an indicator to make a living in trading business. But are indicators really useless?I don’t really think so. Ok, first, I try to understand the construction of an technical indicator, as well as the construction of the understanding of price action in my mind.

Technical indicators are some arrangements of price. The creator reads charts trying to understand the price action, and subsequently uses mathematics presentation to analyze the price action and finally plots it on the screen. Here we have our “Superman Index oscillator”. The indicator that was designed according to the creator’s understanding , and belief of market.
Notice this, before a formula is developed, the creator, in fact, needs to read the price, understands it, blend it with his/her belief of “how does the market work” and subsequently turning it into mathematics. This is the process of development.

How about when we do it without indicator? Well,we again, read the price, understanding it , observe the volume, or looking at narrow range, and finally come to the conclusion that “the selling is over, it is time to buy in and market should continue its uptrend.” Notice the process. In fact, the “Superman Index oscillator” was coded and executed in our mind. Instead of presenting it as a mathematical formula, we have done the processing in our mind (ok, our brain), then we say “Oversold, buy signal”.

Comparing these two processes, I really do not find very much difference. (Well, maybe it hurts the ego of a trader to pull in indicator into his chart. It makes him looks like amateur). The indicator is either drawn on your chart or in your mind.

I see the important components of a indicator: the belief of the trader and his/her understanding of price action. Each of us have our very own belief of market, such as “I see market is not random, it is always moving to form a trend etc”. So does the indicator creator. To me, in order to use an indicator efficiently, I would prefer to understand the internal (construction) of the indicator. Well, you can read tons of charts, trying to observe some patterns of the indicator in relation to price action, however, when market condition changes, the indicator will fail. And you will never know the reason without knowing how it was created.

The problem of trading with technical indicator is that, trader tends to be lazy or being ignorance to understand the mathematics construction behind the scene. Instead, he is focusing in looking for “overbought/oversold” lines, crossover points etc. I don’t think reading some text description of an technical indicator are enough. Understand the programming and mathematics behind, is the preferred way.Tough job though. If I can’t figure out the intention and the construction of the indicator, why do I want to risk my money trading with the indicator? (ok, some traders prefer backtesting the indicator before applying…)

Having said that, the best technical indicator is always the one that is created by yourself. It is just another way of explaining your understanding of market. You have your belief, understand and plan, you code it , and plot it on the chart. You trade with it, without much emotion hitches, you follow it. You are responsible to its success and failure.

Technical indicators can’t help you to understand price action. Instead, you should first understand price action and use the indicator that represent what you understand. Use it as a tool to reduce guess work.

To use or not to use and indicator? It depends on what do you see in it.

Just another piece of my random rant on this topic.

About Gav

A Father, Husband, Trader, and Blogger. A serious coffee addict. Started trading since 2005, trades Futures and FX.

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Comments

  1. The underlying “problem” with many technical indicators is that they are representations of representations. By that I mean a price chart is only a representation of the market. It is not the market itself. When you then create and indicator based on the price chart you are in effect developing a representation of the chart, thus a representation of a representation. You take yourself a step further away from the actual market. That is one of the reasons some folks disdain the use of indicators.

  2. The underlying “problem” with many technical indicators is that they are representations of representations. By that I mean a price chart is only a representation of the market. It is not the market itself. When you then create and indicator based on the price chart you are in effect developing a representation of the chart, thus a representation of a representation. You take yourself a step further away from the actual market. That is one of the reasons some folks disdain the use of indicators.

  3. Yeah, I agree we need to know exactly what an indicator is doing mathematically in order to use it correctly. That’s why I planned an announced a “Better Know An Indicator” series of articles several months back. Since then, I haven’t found the energy to actually write the articles. Oops! But maybe sometime soon…

  4. Yeah, I agree we need to know exactly what an indicator is doing mathematically in order to use it correctly. That’s why I planned an announced a “Better Know An Indicator” series of articles several months back. Since then, I haven’t found the energy to actually write the articles. Oops! But maybe sometime soon…

  5. Richard, I will be waiting for the articles from you…

  6. Richard, I will be waiting for the articles from you…

  7. Great post!

    I used indicators for years and never really got anywhere with them. I think many traders use them with tunnel vision.

    They only see the times on the chart when they give good signals – and ignore the times when they give bad signals. This gives them a false since of security when they enter and exit trades.

    Even though I don’t use technical indicators to make buy/sell decisions, I find them to be a very useful tool for writing scans.

    Cheers!

  8. Great post!

    I used indicators for years and never really got anywhere with them. I think many traders use them with tunnel vision.

    They only see the times on the chart when they give good signals – and ignore the times when they give bad signals. This gives them a false since of security when they enter and exit trades.

    Even though I don’t use technical indicators to make buy/sell decisions, I find them to be a very useful tool for writing scans.

    Cheers!

  9. Nice post! Thank you for taking the time to write this. Keep up the great work.

  10. Nice post! Thank you for taking the time to write this. Keep up the great work.

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