Trading Indicators Are Useless

[wavepicker]

The only thing I have learned that I believe is 100% correct is that if everyone is doing one thing in the markets I will make dam sure that I am not doing the same also.... that is the way to make a consistent living out of trading.

Agree totally with you dovetree. The fields of using fundementals and traditional TA have been thoroughly plowed for many years by many competent people. It is highly unlikely that any significant improvements is acheivable on this well-trampled ground. If significant progess is to be made in beating the the market and to succesfully "trade the traders who trade the market" then a new and unconventional approach to what the masses are using is required.

For me that has meant abandonding methodologies that others are using and coming up with something completely different that I know is out of reach of most, both in terms of knowledge and application.

I know others will jump out and say that there have been many success stories in the last 3-4 years. That is indeed true. However these are not excactly "normal" market conditions. Markets in the main don't always behave this way and we are indeed very lucky to have such strongly trending markets in the last 3-4 years.The party can (in fact history has proven that it will) be over any time. One must have a methodology/plan that is robust enough to be successfully applied in any market conditions, that is trade the markets both up down and sideways. That's the bottom line if you want to trade for a living. Otherwise you will maybe hanging around for a very long time.

Cheers

 

[tech/a]

I'll second that.

Just on the Bullmarket anyone can make a $$.

True.But as one example a 30% hit on open profit from my longterm holdings while not pleasent would still have me grinning like a Duck at the End of Duck season.

Take advantage of what the Market gives you when it gives it to you.

Dont live/trade in fear.

 

[nizar]

Take advantage of what the Market gives you when it gives it to you.

Exactly.
Let the good times roll.

 

[wavepicker]

I'll second that.


Take advantage of what the Market gives you when it gives it to you.

Dont live/trade in fear.

Very much so tech, take advantage what the market gives. That includes the bullmarket or any potential bear campaigns for that matter. Who cares?

Cheers

 

[Bobby]

Agree totally with you dovetree. The fields of using fundementals and traditional TA have been thoroughly plowed for many years by many competent people. It is highly unlikely that any significant improvements is acheivable on this well-trampled ground. If significant progess is to be made in beating the the market and to succesfully "trade the traders who trade the market" then a new and unconventional approach to what the masses are using is required.

For me that has meant abandonding methodologies that others are using and coming up with something completely different that I know is out of reach of most, both in terms of knowledge and application.

I know others will jump out and say that there have been many success stories in the last 3-4 years. That is indeed true. However these are not excactly "normal" market conditions. Markets in the main don't always behave this way and we are indeed very lucky to have such strongly trending markets in the last 3-4 years.The party can (in fact history has proven that it will) be over any time. One must have a methodology/plan that is robust enough to be successfully applied in any market conditions, that is trade the markets both up down and sideways. That's the bottom line if you want to trade for a living. Otherwise you will maybe hanging around for a very long time.

Cheers

Hello Wavepicker,

I like your above thoughts, you mentioned a plan to trade the ups & downs Plus sideways, THATS the hard bit.

Bob.

 

[tech/a]

Who cares?

Indeed.

We will become optimistic opportunists!!
But then again--pessimistic opportunists!!

I used to be indecisive but now I'm not so sure.

Oh bugger it lets simply be opportunists!

 

[soultrader]

I agree that indicators can help a trader in many ways. Whatever works for you great! But still indicators are a derivative of price.

Here is an excerpt from an interview of Linda Raschke Bradford:

AT: Even though you emphasize the primary role of price action, you still seem to use indicators in certain roles.
LBR: You have to put indicators in context. They're background information - never the primary reason for a trade. That said, you can indicators to objectively scan and rank things... Indicators allow you to see something very quickly. My eye can see a rally in an oscillator, price resistance at the moving average and a little bear flag. If I just look at a plain bar chart, I can't put the price action into context as fast. Indicators can help you process the informtion a little more quickly.

AT: But something like that still won't be as objective or mechanical as something like the wide-range bar scenario, which has a defiable probability associated with it right?
LBR: Asbolutely. If is easier to quantify patterns with range functions that it is with indicators, which are derivatives of price...etc

I would attach the article in a .pdf format but I can not seem to find an attachment function for this message box? Maybe someone can help me out here.

Getting back to some charts. Here is an example of why the quote made by Linda Raschke "You have to put indicators in context. They're background information - never the primary reason for a trade" stands true. A trader who is fairly good with price action, volume analysis, and tape does not require any indicator. This is not to say indicators are bad. But trading can be done without them. The old timers, Jesse Livermore, Wyckoff, Humprhey Neill... was never exposed to any indicators. Buying/selling was done through the study of price action and patterns (which has now become modern day technical analysis) If those guys were able to do it... there is no reason why modern traders can not rely on the same information.

Below is a daily chart of the mini-sized Dow contract. As you can see, we are still in a magnificent bull run. However, both the MACD and RSI is indicating a sell signal throughout the rally. Price is king.

Now is market profile and indicator? Well yes and no. Market profile is an interesting concept to understand the markets. It requires creativity if you apply it in your trading. Market profile makes a trader think on its own. It does not generate buy or sell signal. Once you understand it, you will see that it is only a simply study of auction theory. Supply vs demand. Balance vs imbalance. Long term buyers/sellers vs short term buyers/sellers. I do not use market profile by the book. What I have done is studied market profile and applied the concepts to it in my trading. I use the auction theory to see if the markets are in value or outside of it. Once again, it comes down to the basic questions: "What is the market trying to do now?"

It is ackward to say whether market profile works or doesnt work. Because there is no such thing... it is not a system. If you follow each textbook instruction on what to do with market profile, it may not work according to the market. But if you have taken the concept of market profile and have applied it your trading, I truly believe a traders market understanding will increase 3folds.

Textbook MP will say that once value high as been broke, it will become support. And once value low is broken it will become resistance. True and false. If you follow these rules blindly you will be frustrated at the amount of times price leaves value and then travels back in. A trader needs to understand whether the break of value was on good volume, good tape, etc... Here is an example of how I like to use market profile concepts in my trading.

In the chart below, the green dotted lines represent both the value high and value low pivot (VAH and VAL). now on Feb. 6, price opens up above value and rallies to test near the previous day high. The markets love to test these extremes to test for demand and supply. The rally to the test of the previous day high was met by supply. Hence price reverses and is pushed back into value. The textbook rule of VAH become support would of not worked here. Why? Previous day high/low are favorite levels by professional traders. Unless we are seeing significant buying/selling pressure there is a bigger probability that price will not travel beyond these two points. If they do, we have a potential trend day. So professionals often like to fade these levels.

Now as you can see price then fell inside value and broke below VAL. It went on to test the previous days low to test supply and demand. It was met with demand and price went on to rally to close above the previous day high. (notice the sentiment change at the close) The textbook play of shorting VAL would of only worked on the first retracement back to VAL. After all the selling was absorbed (notice the volume spike with red volume delta at 12:00) price reversed.

So how do I play these? I personally have rules when the previous day high and low is right above/below the value area. I always look at the high and low instead of playing the value pivots. Some of you may be familiar with the 80% rule as well. (this is just the name of the setup.) When price lifts above/below value but falls within, there is a good chance price will test the other extreme value pivot. Some traders use this rule to play these setups.

Happy trading

 

[dovetree]

Hi soultrader,

You make some good points about market profile, but I would have to say again market profile is just another indicator, with positives and negatives. Anyone can have an indicator... it is how you use it that makes the difference. Whilst I agree with you (and don't use the ind's you mention) The daily MACD you show is miss leading if you don't look at the higher time frame. The weekly MACD of the YM will show there has been no crosses to the downside( or even looked like crossing )in the time frame you show since Sept 2006. (Sorry I don't know how to attach a chart.)So the strategy should have been look for pull back to buy in the smaller (dalily time frame) and ingnore anything else until the higher time frame changed.

Market profile is nothing more than a way of measuring POSSIBLE areas of support and resistance and often pivot points line up exactly the same.

The problem with all Indicators(MP, Pivots, MACD, etc,etc) is how you use them and the ultimate indicator the hard right hand side of the Chart.

Incidentally who supplies your tick volume(tick delta), can you get it for markets other than the US markets

cheers

 

[ducati916]

jog on
d998

 

[soultrader]

Excellent duc. It seems like all you did was find a market that worked with the MACD. You entirely missed the point of the thread.

dovetree, the TICK Delta is misleading. It should actually be labeled Volume Delta. What it does is it take the number of contracts at the bid vs the number of contracts at the ask and plots whatever the greater on top. A buddy of mine coded it up for me. If you use TS it is available.

 

[ducati916]

Excellent duc. It seems like all you did was find a market that worked with the MACD. You entirely missed the point of the thread.

dovetree, the TICK Delta is misleading. It should actually be labeled Volume Delta. What it does is it take the number of contracts at the bid vs the number of contracts at the ask and plots whatever the greater on top. A buddy of mine coded it up for me. If you use TS it is available.

Well actually no.
dovetree requested a YM chart, I don't have the YM chart, but the DIA chart is in essence going to be pretty close.

And as was stated, in the higher timeframes no signal from the MACD was triggered for a short entry.

Thus if you wish to trade the counter-trend, the entries have to be precise, and will have limited duration and or reward.

jog on
d998

 

[professor_frink]

from the opening post in this thread-

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.

and a more recent comment-

I agree that indicators can help a trader in many ways. Whatever works for you great! But still indicators are a derivative of price.

Hi James,
it seems as if you are starting to soften your stance on indicators a bit. Would that be an accurate statement? And if so, has there been any particular reason for the slight change in stance?

There has been some great dip buying opportunities into the moving average on the chart you posted(it looks like a 40 or 50 day MA). I personally think moving averages are a great lazy man's S/R area to keep an eye on.
As for the MACD, I agree with Duc, it hasn't dished out a short signal, as it's still above the zero line- all it's showing is a loss in momentum. A quick glance at the chart and you'll see it- And that's why I think indicators get a bad rap- alot of people(especially newbies) look at the indicator first and price action 2nd, when it should be the other way around.
The comment from LBR in your earlier post said it best- "Indicators can help you process the information a little more quickly".
IMO any indicator that helps me process information a little quicker is something I want displayed on my chart.

 

[ducati916]

Prof

If you look at the DIA chart, the price action displayed a picture perfect double bottom............the MACD [if you drew a trendline] was a higher low.

This sort of signal is where [potentially] indicators can be useful. You can place a tight stop on the price action, and try to catch the MACD trend.

To dismiss indicators out of hand is simply incorrect. If you don't *like* them that's fine, but they can have their uses if used correctly.

Incidentally it was dovetree who noted the MACD in the higher timeframe.


jog on
d998

 

[nizar]

Excellent discussion here.
I agree with what Prof said. I think MACD is quite an accurate indicator.

 

[tech/a]

Indicators used in ISOLATION are pretty well USELESS.

 

[professor_frink]

Prof

If you look at the DIA chart, the price action displayed a picture perfect double bottom............the MACD [if you drew a trendline] was a higher low.

This sort of signal is where [potentially] indicators can be useful. You can place a tight stop on the price action, and try to catch the MACD trend.

To dismiss indicators out of hand is simply incorrect. If you don't *like* them that's fine, but they can have their uses if used correctly.

Incidentally it was dovetree who noted the MACD in the higher timeframe.


jog on
d998

I agree Duc.
If I was going to use the MACD, I'd be looking for that kind of pattern. Although you would have been struggling to make a buck trading the divergence on the way up(though the potential was there if positions weren't held for long-and looking at it with the aid of hindsight always helps too!)

Excellent discussion here.
I agree with what Prof said. I think MACD is quite an accurate indicator.

Sorry nizar, that wasn't the intention of my post. I never meant to say it was accurate. I don't think it's any more accurate than any other indicator out there(personally, I prefer the RSI, but they basically do the same job).

 

[nizar]

Sorry nizar, that wasn't the intention of my post. I never meant to say it was accurate. I don't think it's any more accurate than any other indicator out there(personally, I prefer the RSI, but they basically do the same job).

Yeh i meant i agreed with your observation that MACD did not turn negative ie. give a short signal, in soultraders example.

Cheers

 

[professor_frink]

Yeh i meant i agreed with your observation that MACD did not turn negative ie. give a short signal, in soultraders example.

Cheers

Ok then.

 

[ducati916]

Indicators used in ISOLATION are pretty well USELESS.

Standalone statements are pretty well useless.

Oh, ok.

Could you not argue the inverse, that *price* in isolation is pretty useless?

jog on
d998

 

[tech/a]

Hmm cant see the mention of Price anywhere?

If you were to classify Price as a stand alone indicator,and I guess the patterns associated with price action Triangle,Flag,Pennent,blah blah,then yes.