Technical indicators

[Caseynotes]

  If there was something that could routinely predict the future of price the market would recognise it and counter it, algos have, over time, resorted to high frequency quick reaction trading with very short term exposure precisely because of this natural market evolution.

All indicators must be based on the past because they can't be based on the future and only hope to be better than a roll of the dice.

Support and resistance (S/R) are useful because these levels were significant in the past and so may be in the future, pivot points are useful because their levels are based on recent time scale highs and lows (daily is best) so are related to S/R. 

The only indicator that would really work is one that told you a big order was about to be placed but they call that 'insider trading' and apparently that's frowned upon, besides, I don't know any real big traders

So we must rely on a combination of tools rather than a single signal generator, watch how price action responds to significant levels (S/R, PP, MA, Fib) then consider momentum or momentum divergence to add weight to what you see. 

[Mercury]

Agree with that  also  I would comment that the only rule is that there are no rules, the markets will do what they do and the best we can hope to do is recognise a trend that betrays the sentiment behaviour of the market players.

 

When we talk about rules or guidelines or whatever it really pertains to our own method, a means to keep us honest with respect to our selected approach and thereby reduce the likelihood of emotional or reactionary trading.

 

As Peter Brandt said in his book, "Diary of a Professional Commodities Trader", and I'm paraphrasing here, Trading is neither a science nor an art but a craft that must be practised over and over again to become honed.

[Mercury]

I would also point out that  and I often agree across the board on these concepts and yet he is a daytrader/scalper and I a long term swing trader...

[Guest Trader_1707]

. How you don't know about big traders? And William Gann? And Gerald Appel with his MACD? And John  Bollinger? And finally Nial Fuller?

 Nial Fuller is from "another field" with his price action, but also make profit on this. 

Many famous traders whose names are known due to their invented indicators or their theories. So I want to understand, WHAT that people saw in their indicators and theories, that makes them to trade with profit?

[Caseynotes]

Yes that is true   but consider everybody who uses MACD or Gann or whatever is not automatically profitable, in fact nearly everyone starting out will have tried and abandoned each of them in turn because the shortcut to success is to find a reliable signal generator for profits, but none of these indicators will do that, which is why most new traders give up within a year.

The key is to be able to read a chart, decide on a bias, see indicator consensus, then find an opportunity to join in means that the indicator is only a part of the whole. Chart reading, decision making and trade execution are all more important than the indicator.

 

It use to be said that you needed an 'edge' (one key thing) to be successful but many are saying now that you are the edge, that you need to develop a holistic approach rather than looking for off/on switches because you will run out of resources before you find one because they don't exist. All developers of indicators say 'not to be used in isolation' because they have done the testing and know they wont work if you do. 

 

 

[Guest Trader_1707]

Who and what think about "The Dow theory", especially about it's six basic points?

 

 

[Mercury]

Hmm, not sure I know much about it but my general observations are as follows:

 

1. The "main movement" stuff is like EWT really, which I use
2. Market trends have three phases: I buy that too in general but again it is represented by EWT
3. The stock market discounts all news: sure, in fact they preempt it, which is why news releases seem to have the opposite short term impact.  Also if we are talking about MSM rather than data release then contrarians would have it that this spells the end of a trend rather than the beginning.
4. Stock market averages must confirm each other: also buy this, which is why I analyse across multiple related markets and like to consider which sectors are moving as part of an overall index trend (I have asked IG for sector charts but alas no sign so far)
5. Trends are confirmed by volume: I do think volume is a useful indicator, especially after major turns (high volume) and exhaustion rallies (low volume) but volume alone is not a useful indicator.
6. Trends exist until definitive signals prove that they have ended: well that is what we all look for isn't?  Trading signals.

So in short sure no problem with it as an overarching theory but no use in terms of actually identifying trading opportunities.  Nice to know it fits well with other stuff that does help though...

[Caseynotes]

Hi  and .  Dow Theory (DT) is indeed the precursor of most technical analysis used today.

It was noted in the late 1800s that price on a chart moved in waves though that in itself gave no indication as to when and where change would occur.

DT also noted periods of accumulation, absorption, and distribution which was added to by a Dow contemporary Wyckoff who developed it as the Wyckoff Market Cycle which lead to support and resistance and supply and demand levels. 

Using averages suggested in DT have developed into the multitude of momentum indicators we see today.

Increasing volume is still used to confirm a trend and DT also suggested chart patterns to indicate trend reversals such as the head and shoulders pattern.

 

Not much has changed really.

 

 

[Mercury]

Apart from central bank policy interference of course...   Still I have faith that the twin market dynamics of fear and greed (i.e. sentiment) will reassert itself soon enough and then watch out!

[Caseynotes]

Yeah,  'efficient market theory' has a bit of a problem at the moment, what is news and what is just plain central banker manipulation? Carney this afternoon (as we predicted) taking credit for turning the economy around with his rate lowering post Brexit crash haha.

 



[Guest Trader_1707]

Hi,  and !

I especially asked the question about the Dow theory, as this theory knows everybody, but one point in this interests me the most: trend is “valid”  until will be indicated an  unmistakable, definite  signal showing the end of the trend. Actually my thinking is about what is considered the clearest signal to the change of the trend - the price does not update the highs / lows of already existing trend? Can this be considered as a clear signal to the forthcoming change of the existing trend?

And generally, according to Dow theory, as I understand, there must be the technical analysis on multiple time frames:  for example, starting with the analyzing of weekly timeframe, then daily time frame, and after this, on the hourly time frame - to find an entry point into the market.

[Mercury]

I imagine it is different for everyone and depends on time frame you trade.   can give you a day traders perspective but as for me (longer term trader) I use multiple analytical techniques on multiple timeframes to hone in on a tradeable event and for major trend changes I also like to see contrarian sentiment and MSM signals (i.e. when the consensus for a trend is too great I start to look for a reversal.  The techniques I use include: EWT; Tramline pairs, Head & Shoulders, Diagonals and Triangles, double tops/bottoms, Fibonacci retracement, Major Support/Resistance zones, Momentum Divergence with price, RSI and Stochastic.  I don't tend to use all at anyone time but have a series of rules that must all be correct for me to take a trade and even then many go wrong.  That is trading, noting is foolproof.

 

 

[Caseynotes]

Hi  &    Future certainties don't exist, there are only future probabilities. Certainties can only be viewed with hindsight. You can waste years looking for a 'holy grail' indicator or pattern but there is no such thing to find precisely because of the 3rd tenant;

The stock market discounts all news

Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow theory agrees with one of the premises of the efficient-market hypothesis.

 

Charts can only reflect what is happening and what has happened, you can draw all the lines you like on a chart but it wont make it happen.

 

For example, this morning AUDUSD pushed through yesterdays high and pulled back to give me a nice entry signal at 7:30am but i hesitated because of resistance ahead at 7711, now I am kicking myself.

 

[Mercury]

That is true  and anyone who thinks they can predict what the markets will do with any kind of analysis (technical or fundamental) or any kind of indicator is smoking the good stuff and will soon be broke.  This is a bit like the Fermi paradox for ETs (If they were out there they would already be here - or we would know about them I guess is what they are really saying).  Similarly if there was a way to accurately predict what a market would do everyone would be doing it, which would kill the market...

 

However technical analysis does offer a way to make sense of the chaos and whether that is EWT, Charting, Fibs, Support/Resistance or Price Action doesn't matter much in my view.  You have to have a methodology for assessing the market and deciding on a trade entry and exit and where to put your stops.  If you don't then you are just flipping a coin.  The interesting thing about flipping a coin on the markets is that you can be initially right and still lose money...

 

The one thing I do not subscribe to is purely indicator based trading.  Indicators constantly give false reading at various times, depending on how you read them and context and so on.

 

The only thing that makes sense to me (and works) is a methodical analytical process that prepares your for a high likelihood low risk trade entry then take a chance and if you get stopped out for a small loss reassess and go again if it looks right and so on until you hit a vein and the ride it like ****. 

[Guest Trader_1707]

,  it's too right!

In addition to all available indicators, theories - there is also a simple intuition and so called “feel” of the market. I mean that all these indicators, theories of Charles Dow and so on,  must be aligned in according with own strategy.

 

[Caseynotes]

Yes i agree with the last two posts  &  If there is a 'holy grail' in trading it is simply to match a higher than average probability set up with a low risk entry (tight stop).

[Mercury]

I agree  but I would point out that this feel can get people into serious trouble too.  This is the so-called market psychology (really own psychology) that so many of us bang on about all the time.  Finding ways to manage this include having a fairly strict methodology with criteria that must be met before you enter a trade.  For sure this will mean you miss some good ones but, if the method is sound, it will stop you form getting in and more importantly staying in some very bad ones.  Keep in mind that as soon as you are stopped out of a trade than then leaves you behind as it heads in the direction you thought it would OR you miss out all together having tracked a trade for a while the very next day there will be another opportunity, maybe in a different market.

 

For me the key is to have your own method and practise it routinely every day.  By all means read other peoples musings but you must make up your own mind and not allow yourself to be adversely impacted by others.  Sometime other peoples thoughts cause me to question myself and that is a very good thing (I'd like to see more of that on the forum).  Sometimes that questioning results in a chance of mind and sometimes the reverse, all good.  The point is it is up to me to decide what I am going to do.  Simply following other is just as risky as simply following indicators.

 

As mentioned before the biggest learning I have had is to accept losses and missed opportunities as part of the business of trading, shake it off and look for the next set up.  Lose small, win big!

[Caseynotes]

I mentioned Richard Wyckoff earlier in the thread so I have added some background info on his method. A 12 min video on Wyckoff entry zones using large time frame charts but the theory works on any time frame. Plus a fulsome article by stockcharts. 

 

http://stockcharts.com/school/doku.php?id=chart_school:market_analysis:wyckoff_market_analy

 



 

 

[Caseynotes]

New video from Tradeciety on trading 'order blocks' which are supply/demand levels, related to Wyckoff's accumulation and distribution zones.

 

https://t.co/Qvwi2KorI8

 

 

[Guest Trader_1707]

Thanks, ,

Your messages about Wyckoff's accumulation and distribution zones always very useful for me, as I am developing my own strategy based exactly on such type of trading. I have bookmarked all your linkes connected with Wyckoff's method. 

[Caseynotes]

Very good article on the problems with the application of technical analysis and what to do about it (Tradeciety)

 

http://www.tradeciety.com/technical-analysis-problems/

 

[Caseynotes]

Very good blog piece on the use of technical indicators and when their use may be misleading. As all indicators are based on past data if the recent past data was relatively random the indicator projection will be random as well so 'keep disciplined and follow your process' may be just what not to do.

 

http://traderfeed.blogspot.co.uk/2017/02/when-technical-analysis-works-and-when.html

 

[Guest GaryB]

Technical analysis unprofitable? 

I am not sure putting the blame on the tools of trade is really the answer. After all it just reports price action from the exchange.

 

Take the time to use the information a little differently than everyone else, after all if you try and see and do the same you would get the same results..right?

 

Take the time and build some stats on how often that bullish hammer follows thru into a pivot point buy signal (btw 75%) or that down close outside range reverses the price action using the daily time frame in the  AUD/USD cross (btw 100%).
How often does that large range bar post a new higher high in the following bars and how many times. ( any time frame )
Stop trying to discredit the information, but use the information like a casino and find the odds in your favor then manage the risk.
( stop losses ARE the key to money / account management)

Print out a chart with 50 bars max. markup the outside period the inside periods the large range bars, the spike highs and spike lows. Do this for 500 bars,  10 pages.

Notice how the spike H and spike L prices react when they exceed a nearby spike H or spike L, put together some stats on a ruled sheet if you dont use spreadsheets.

Follow thru for 1 bar? 2 bars? 3 bars? do this and you will be surprised how that trade you think is the "one" it is never "the" one.
Trading is a marathon, trades are one of many, understand the basic odds and then you have the basis of a rule based trading paln.
Build an understanding of the game and stop fussing over some esoteric summation of TA using one model over several markets..

[Caseynotes]

Hi   

Thanks for that instructive insight with examples we can all use, very enlightening. True, putting in the homework is an important factor in achieving success as in any endeavour and the statistical analysis of candle patterns and chart patterns is well worth the effort.

 

I think the main problem people have with technical analysis is that it is usually momentum based and therefore should come with the warning that ‘past performance does not guarantee future results’. The small players jumping aboard momentum are often getting in late with their stop orders just as the big boys are lifting the phone to place their limit orders.

 

This trader’s forum is no different to the others, people come but most don’t last because they put all their faith in a technical analysis ‘tool’ only to find it doesn’t really work. They become a slave to it thinking it can predict and so expect too much from it. Momentum is useful when comparing it to price flow then looking for a chart pattern to provide an entry that has a higher than average probability of success.

 

Fully agree that probability is the most important factor and you can only know the probability of an event happening if you have done the research. This takes time, reading ‘TA for Dummies’ only takes a weekend.