Trading Indicators Are Useless

[Wysiwyg]

Does anyone know of software systems that computer project the probable future direction of share price?

Reason being a computer derived future indicator would remove the analytically derived future belief.

Thanks...bye.

 

[tech/a]

Does anyone know of software systems that computer project the probable future direction of share price?

Reason being a computer derived future indicator would remove the analytically derived future belief.

Thanks...bye.

Funny you should ask.

YES its been done.

Thanks to Jose Silva.

Youll find all the Metastock code here.
The holy grail.

http://www.metastocktools.com/MetaStock/HolyGMkIV.txt

Anyone with Tradesim stick that in your systems test and run a report---see you in Barbados!

 

[lesm]

Reason being a computer derived future indicator would remove the analytically derived future belief.

What would make you think you think that a computer derived indicator would not be based on some form of analytical approach?

It would still be providing a form of derived future belief at a level of probability within specific level of confidence. It will not be absolute, but it will be emotionless.

It would still be based on some form of probabalistic approach, even if it was using a combination of fuzzy logic and pattern matching. It would be capable of doing it faster than a human, as it could run through more comparative combinations, providing a ranking of probabilities and selecting the most likely candidate(s).

This, in reality, is no different to how the engine under Fritz 8/9 works, or other similar engines. The techniques under the covers may be diffferent in terms of the trading, but how succesful it would be would depend on its developers.

For those not familiar with Fritz. This is the computer chess game that beat Karpov. From memory, Karpov beat Big Blue.

 

[Wysiwyg]

Yes lesm ...you are right in saying the program would only be as good as the developers with there experience, belief and maybe even a little emotional reaction programmed in too. If it is around and successful we probably would not hear about it.

Anyway...I play online chess at the site below.It is free and fun and if you want to get into the pro`s then one can join to.Thanks for your input lesm. and tech/a.


http://www.chessanytime.com/

 

[Dutchy3]

This is a post very close to my heart. Totally agree with souls original thoughts on page one. I do like to see volume increase though too. I take positions based on a weekly chart of stocks breaking out of big bottoms. Sounds gross and yes in a bear market I'm sitting on piles of cash. However I am at the stage where 4 -5 decent trades present themselves in a 12 -18 month period and satisfy my plan targets

Why we collectively try and complication what is a most basic of situations with all these indicators eleudes me too

 

[lesm]

If it is around and successful we probably would not hear about it.

Too true. If it is around and successful, why advertise the fact.

Anyway...I play online chess at the site below.It is free and fun and if you want to get into the pro`s then one can join to.

Thanks for the chess site link. Noticed that Fritz 10 is scheduled for release in mid-November.

I used to play a lot of chess and came second in a tournament once. After we finished they lined the winner and myself up against eight opponents each. Playing muliple opponents at the same time is interesting.

Nowadays, I tend to play computer chess more, as a lot of human opponents are too easy to beat. Some computer chess games are a bit of a joke, as they are too easy to beat. Throw these away very quickly, as they are a waste of time and no challenge.

Recently, introduced a colleague to a good quality computer chess game and he's now hooked and threatening to challenge me to a game. Will pass the link onto him. He still needs a lot more practise and game skill development time.

Cheers.

 

[bunyip]

As a professional futures trader, I have spent my early days of my career making every possible newbie mistake in trading. This involved relying on rookie indicators such as the stochastics and moving average crosses, from relying on candlestick patterns, and newbie chart patterns such as head-n-shoulders and triangles.

As a new trader I lost 2 trading accounts without cleary understanding the pure action of price. The day my trading career turned around was the day I took all my indicators off and relied soley on price action. I then studied market profile to understand price acceptance vs rejection; market balance vs market imbalance.

Now, my core methodology is based on market profile, pivots, and tape reading. Indicators in my opinion are useless. A new trader who relies on indicators will never learn the true art of trading. Market conditions change everyday and indicators and systems must be tweaked constantly. Yet, newbies look for indicators as the holy grail.

Indicators indicate. They are lagging signals. Profitable trading requires understanding market concept and understanding the language of the markets. Every trader must be in sync/zone with the markets. Just listen to it carefully... and you will be able to hear what the markets are telling you.

I always recommend new traders to stare at price and tape until they are able to understand price action. Rely on proven strategies using market internals and support & resistance levels. Tape reading offers a significant edge in short term trading. Combine strategy, knowledge, and money management and you will be light years ahead of other traders.

Good luck

Soultrader

As a trader of some twelve years experience I agree with you on some points and disagree with you on others.

Indicators are useless?
Yes and no. If you trade a particular setup when it shows up in strongly trending stocks, then including one or two trend strength indicators as part of your scan criteria can be very useful, even if you don't display those indicators on your chart.
However, there's absolutely no point in putting half a dozen indicators on the chart, many of which more or less duplicate each other because they do pretty much the same thing, i.e. measure momentum.
I'm amused when I see people post a chart on a forum, and they include RSI, ROC, Stochastic, W%R, MACD, and maybe a couple of other indicators as well. In fact they sometimes have so many indicators below the chart that the chart itself is scrunched up too small to see clearly.
The price action itself is the best indicator of all. But when it comes to performing scans, some software can scan for patterns in indicators but not patterns in price action. Choosing an indicator that closely tracks price action, then including this indicator in your scan criteria, can be a way of getting around this problem.
As a futures trader you're probably following a watchlist of no more than 20 markets.....a small enough number to eyeball each chart without using up much time.
Different story for a stock trader who might follow a watchlist of a couple of hundred stocks......the ability to run a scan can be very useful and time-saving for this trader.

Understanding price action is most important?
DEFINITELY, agree 100%. Too many people allow indicators to blind them to what the price action is doing. Example.....they'll bail out of a strongly trending trade because an indicator hits an overbought reading. If they took notice of the strongly trending price action rather than looking at the indicator, they would have stuck with the trade as long as it kept trending well.

Markets change every day and systems must be tweaked constantly?
Don't think I can agree with you on this one. I can put decades of past futures charts and stock charts on my screen, and I can tell you with absolute certainty that the same patterns, trends, support/resistance levels etc that were evident on charts 10 or 40 or 50 or 70 years ago are still showing up on today's charts.
Robust systems that traded in the past from price pattern setups, support and resistance etc, can still be used to successfully trade todays markets - no tweaking necessary.

Just listen to the market carefully... and you will be able to hear what the markets are telling you?
Definitely......studying price action, support/resistance, trends, and retracements, is the way to hearing and understanding the message of the market.

Bunyip

 

[soultrader]

Markets change every day and systems must be tweaked constantly?
Don't think I can agree with you on this one. I can put decades of past futures charts and stock charts on my screen, and I can tell you with absolute certainty that the same patterns, trends, support/resistance levels etc that were evident on charts 10 or 40 or 50 or 70 years ago are still showing up on today's charts.
Robust systems that traded in the past from price pattern setups, support and resistance etc, can still be used to successfully trade todays markets - no tweaking necessary.

S&R and price patterns is not considered mechanical trading. You are not relying on a indicator signal. Perhaps you are confusing this with technical analysis?

Indicators can be used as a confirmation of price. But I would never put indicators before price action. A simple RSI and price divergence is backtested and known to make money. However, most traders do not design any rules for a simple setup. If a trader goes long on a trading signal off a mechanical system, why do they trail a stop? Their exit should be when their mechanical system tells them to exit. I say this because the entry point was not based on price action.

Im not saying mechanical systems are 100% useless. But those who make money off them are the minority. There are more profitable discretionary traders than mechanical traders. How did Long Term Capital Management lose money? They built a system based on historical events. When economic and market conditions changed, they got wiped out clean.

Price is king.

 

[wayneL]

I made a points of reverse engineering any of the indicators you care to name, to understand what the reading was actually telling me.

An interesting thing happened out of that... I can pretty much know what the indicator will look like by looking at the price action. This makes the indicator obsolete.

Pure price action for me + pivots of various time frames. I will use a trailing stop which necessitates plotting a mathematical construct. (ie an indicator)

Sometimes an oscillator for the pretty colours (I might spot the odd divergence if I remember to look too ).

Oscillators and other indicators are useful for "scanning" the market with to bring up a list of candidates. But to trade off..... suboptimal IMO.

Thats my $0.02

 

[wayneL]

Some further comments about Soultraders mechanical system comments.

SouL,

I note you trade futures. Presumably you trade a range of commodities, indicies, treasuries etc.

In this context, I wholeheartedy endorse your assertions that mech. systems to not work very well... unless one has VERY deep pockets.

It is a bit different with stocks as Tech/A and Stevo can attest to where mech systems can perform very well.

Just another $0.02

Up to $0.04 now

 

[lesm]

Why we collectively try and complication what is a most basic of situations with all these indicators eleudes me too

Possibly some people may think that more indicators is better than less, which in reality is a misnomer.

An inherent issue is how many of those people that use more indicators believe that it provides a more reliable or higher probability that their so called analysis is correct. Whereas, less is probably best.

You may also find that people who use the more is better approach don't understand the underlying basis upon which indicators are calculated on. You will often find that they think that they are using multiple indicators for confirmation. Whereas, what they may be seeing is the same outcome calculated from the same underlying basis and represented in a different manner. Effectively the same result due to the indicators being highly correlated. Hence, a sinlge indicator is actually all that is required. Unless they are using uncorrelated indicators they are wasting their time and effort.

Depending on the underlying market dynamics they may also be using indicators that are giving misleading signals, as they are applying the indicator in a context that it actually wasn't designed to be applied in. This is a blind use of indicators for the sake of using indicators.

There are possibly too many books available that push the use of indicators, without providing a detailed description or any caveats surrounding the usage and application of indicators. The examples used, demonstrate the use of the indicator in a situation where it is designed to work, with no contra examples being provided.

This leads to a misquided view that trading can be succesful by buyng a charting/trading program taking out a data subscription and voila, anyone can be successful in the market. Yet, 90% or more of traders still fail.

A good point that Soultrader made was related to tape reading. How many people today can effectively read the tape? How many peopl today, would actually make the effort to try an understand ho to read the tape?

With tool snow aviable there will be a far lesser numbr of traders in the past that used to prodcue charts by hand. This exercise alone can provide a different insight into chart behaviour, rather than relying on fully automated approaches.

I think, from what I see, that there are far more successful mechanical traders than Soultrader is giving credit too, but he is qualifying his comment based on what he has seen.

The successful mechanical traders have done the hard yards and the work to be successful. How may traders are failing from trying to do it the easy way and don't put the effort in to developing succssful systems?

There are also successful traders using the approach referred to by Soultrader, but again these are the traders who are putting in the time and effort and not relying on books and other peoples ideas.

Cheers.

 

[Magdoran]

S&R and price patterns is not considered mechanical trading. You are not relying on a indicator signal. Perhaps you are confusing this with technical analysis?

Indicators can be used as a confirmation of price. But I would never put indicators before price action. A simple RSI and price divergence is backtested and known to make money. However, most traders do not design any rules for a simple setup. If a trader goes long on a trading signal off a mechanical system, why do they trail a stop? Their exit should be when their mechanical system tells them to exit. I say this because the entry point was not based on price action.

Im not saying mechanical systems are 100% useless. But those who make money off them are the minority. There are more profitable discretionary traders than mechanical traders. How did Long Term Capital Management lose money? They built a system based on historical events. When economic and market conditions changed, they got wiped out clean.

Price is king.

What a breath of fresh air, someone who talks sense about the strength of discretionary approaches – Long Term Capital Management is a great illustration of the pitfalls of basing too much emphasis on past data over what is unfolding now, and being able to anticipate key changes in the market conditions ahead of time.


Magdoran

 

[lesm]

An interesting thing happened out of that... I can pretty much know what the indicator will look like by looking at the price action. This makes the indicator obsolete.

Oscillators and other indicators are useful for "scanning" the market with to bring up a list of candidates. But to trade off..... suboptimal IMO.

Wayne,
Agree with your two points above.

Using both price and volume, as appropriate, provides a better indication than indicators. For short term trading I actually use an approach that is similar to what Soul mentioned in his original post. Indicators just get in the way and diminish in value. Certainly, suboptimal from a live trading perspective.

 

[swingstar]

I made a points of reverse engineering any of the indicators you care to name, to understand what the reading was actually telling me.

An interesting thing happened out of that... I can pretty much know what the indicator will look like by looking at the price action. This makes the indicator obsolete.

That's the point I was trying to get at. Most traders don't even look into the calculations of an indicator and what it's plotting from price (I was, and probably most people are, guilty of this when new to trading). Funnily a lot of indicators have questionable logic in the first place. I think if you're going to use an indicator, you really have to know its internals and what it's telling you--and then, you need the experience or need to have done a lot of testing to know if that means anything in the current conditions.

 

[MichaelD]

A good point that Soultrader made was related to tape reading. How many people today can effectively read the tape? How many peopl today, would actually make the effort to try an understand ho to read the tape?

Perhaps an even deeper question is how many people today WANT to make it their life's routine to read the tape? As someone personally working towards trading for a living, I for one do NOT want a job watching the course of sales on a computer screen all day.

Entertaining and enlightening for a few hours here and there, but every day? Not for me.

(I do concur about the pointlessness of indicators in general, however).

 

[soultrader]

Perhaps an even deeper question is how many people today WANT to make it their life's routine to read the tape? As someone personally working towards trading for a living, I for one do NOT want a job watching the course of sales on a computer screen all day.

Entertaining and enlightening for a few hours here and there, but every day? Not for me.

(I do concur about the pointlessness of indicators in general, however).

As a day trader, I trade the opening 90 minutes and the final 120 minutes. Total of 3 hours and 30 minutes everyday.

Not that bad right?

Most of tape reading is noise. The most important thing about tape is to watch it as price reaches key levels. You are watching to see if price will hold or fold. If you plan on watching tape from 930 am - 500pm eastern be my guest.

And professional traders are usually in it because they love to trade. Whether its tape reading, market analysis, or just remaining flat..... these are things we love to do. Whether one reads tape or one decides not to because it sounds boring is a difference in passion.

If youre in it only for the money.... you will probably not last in the long run. Trading (and poker) is in my blood. I think about it after the close, I analyze every trade I took for the day in my head, and seek ways to improve everyday. Sometimes I even dream about it.

And I guarantee that Im not the only one having this kind of mentality. So picture your competition.

 

[lesm]

Perhaps an even deeper question is how many people today WANT to make it their life's routine to read the tape? As someone personally working towards trading for a living, I for one do NOT want a job watching the course of sales on a computer screen all day.

Entertaining and enlightening for a few hours here and there, but every day? Not for me.

(I do concur about the pointlessness of indicators in general, however).

Understanding how to read the tape has its advantaqes. How onerous it may become is up to the individual trader. Would argue that it doesn't need to be as onerous as it sounds.

You should find tech/a's thread on Discretionary Trading interesting as it develops, including how he uses the scanning software he has.

 

[lesm]

As a day trader, I trade the opening 90 minutes and the final 120 minutes. Total of 3 hours and 30 minutes everyday.

Not that bad right?

If you plan on watching tape from 930 am - 500pm eastern be my guest.

And professional traders are usually in it because they love to trade. Whether its tape reading, market analysis, or just remaining flat..... these are things we love to do. Whether one reads tape or one decides not to because it sounds boring is a difference in passion.

If youre in it only for the money.... you will probably not last in the long run. Trading (and poker) is in my blood. I think about it after the close, I analyze every trade I took for the day in my head, and seek ways to improve everyday. Sometimes I even dream about it.

And I guarantee that Im not the only one having this kind of mentality. So picture your competition.

Soul,

You make a couple of good points above.

People may not realise that traders, especially in the futures markets, are trading particular time frames and not necessarily the full session.

The competition is fully utilising their skills and knowledge to trade the market and are 100% dedicated to successful trading. Doesn't mean that they won't incur a loss at times, but they sure know how to hold and when to fold.

 

[stevo]

What is really wonderful is that there are so many different views on how to profit in the markets. This is what makes the market what it is and gives those that have the skill the ability to make money.

stevo

 

[soultrader]

Heres a quote from a trading buddy of mine.

"I believe focusing on market-generated information, instead of indicators (which are a derivative of price), is essential for developing a robust and sound trading methodology that will withstand the test of time."

Amen.