Mistake or failure#2 ?
Amitman posted a SPY 0.1 rng in which he highlighted a real example of timing failures in which price analysis was ok but the trigger and exits were not very consistent. I think this example can be very useful in the context of indicators.
A brief summary (amitman correct me if I got something wrong):
Direction Indicators (Macro direction): 144 WMA
Price Analysis Indicators (Wave analysis and current direction): 17 HMA
ââ¦the HMA17 is also my H/L waves analysisâ¦â
Indicators for triggers, exits and failures (Timing): 17 HMA and predefined targets
ââ¦my trigger is when the I have a green bar that close above the HMA and at least Most of it is ABOVE the HMAâ¦â and
ââ¦my exit and stops are based on fixed prices which is 20c for profit and 15 cent for the stopâ¦â
The problem:
As you can see in the chart this was a bad trade according to his PBP âcause he got stopped out. What it was even worse is that after a few bars price confirmed that it was a valid trade but when that happened the indicators for wave analysis were not pointing out longs (LL and LH)⦠so what was the problem? Price failure?
Itâs easy to analyze a chart ex post and blame the indicator. The 17 HMA was not good enough in this particular trade!!!. Look what happen if you have used a 25 HMA as wave and trigger indicator⦠A perfect entry with curiously (or maybe not) at a better price (9 cents cheaper) than the faster 17HMA (why?)
Of course claiming that a 25 HMA is better than a 17 HMA is very relative and I do understand why you used a faster HMA, SPY in a 0.1 rng chart is fast, and many times a change of slope (or even a close) above/below a 25 HMA can give you very but very late signals.
For example the last two trades before your example would have been winners with a 17 HMA and losers with a 25 HMA but the two trades after would have been almost perfect with the 25 HMA and not with the 17 HMA.
This exactly exemplifies the
tradeoff between indicators/efficiency and price analysis/consistency. All of these trades (including your example) have something in common: they all are consistent with price analysis. You were right taking that long; it was valid long but your indicators were not pointing at that, even if you saw and knew that price was going up. Indicators blur analysis!!! â¦
Again nice in theory but sadly in reality we canât take trades if we donât have and objective trigger and without stops that are consistent with risk. So how can a small trader solve or find the right balance between efficiency and consistency?
Iâll continue later, but a good tip is:
if basic price analysis tools explain and have better and more objective triggers than the ones given by your indicator⦠your indicator is either not good enough for your PBP or you are not using it properly⦠again the cui bono
jjrvat
PS: TheRumpledOne, yes zigzag is a very good visual aid for lasts Highs/Low. As always, use it but no abuse it.
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