I have finally removed every indicator (with the exception of 200 and 50 SMA's on daily charts as a tribute to my mentor) off my charts. I will tell you my experience with some of the most popular day trading indicators and why I ended up going indicator-less like many many top traders at my firm (and on this board) did.
Stochastics: When I started working at my firm I started with the 1 minute stochastic scalp method after I read Jay's book of UndergroundTrader fame. After a long struggle, I realized that this indicator simply generates way too many fake signals. Ok, I understand you are supposed to use it on pullback's of an uptrend, but the cold hard truth is when a stock is oversold, if you look at the chart itself, it always look like it about to start a downtrend, sure, sometimes it bounces, other times it doesn't. The problem is the times it doesn't bounce will hit you hard as the stock will blow your stop and spread you hard, and when it does bounce, many many times it will not reach 80-100 overbought area, it fades out somewhere along the line. By the time the stochastic actually generates the sell signal, you are left with a flat trade. Worst of all, almost all breakout's and breakdown's are considered overbought and oversold, this indicator just conflicts with my own trading too much. I never ever traded profitably after commissions with it, although I was making money for the firm, gross positive and building up a net loss.
Moving Averages: On daily charts, 200 and 50 are sometimes important levels. The problem is, there is ZERO meaning of the average price of last 200 period, other than it is an average. When used as support and resistance levels, it may work, it may not, if the stock is the kind of stock no one trades then it won't work at all, if the stock is vastly popular the specialist will always blow your stop around that level before going in the way it is supposed to go. I keep it more or less as a tribute to the man who introduced me to Technical Analysis, but I rarely use it. On intraday charts, it is even worse, why would a stock bounce off a moving average? There are so many people using so many different parameters, and all it can tell you is whether the stock still has momentum. It is NOT support NOR resistance, it DOESN'T tell you where the buyers and sellers are, it ONLY tells you if the stock still has momentum. By the time you get a crossover on this thing you are already way out of money. I used to use them to set trailing stops, but I realized a trailing stop using a moving average is just like a quarter point stop, it has NO real technical meaning other than it is an average. I would much rather set my stop below a breakout level, or when a stock pulled back and printed size at a certain tick without breaking it, set my stop .1 below that level, or simply below the low of a previous candle.
Bollinger Bands: I have to admit I really liked it when I first used it. Bounce off the low band and such worked wonders . . . The problem is, again, the bands themselve are not true support and resistance levels, merely a momentum indicator and a overbought/oversold indicator. I can't explain exactly what is wrong with indicator, I think it made me took too many bounce of the band type of trades that just went nowhere. Many many trades where a stock would seem to break out of a channel to the downside and snap right back up to trigger my stop above the midband before tanking. Of the 3 indicators I have traded with this is the best of the bunch, but it also put me into my current losing streak, not because the indicator itself is the fault, but rather because like an invinsible set of ropes they tied my trading hands.
Here is why many many successful traders do not use indicators. Every indicator is intended to do tell you the state of the stock, is it uptrending/downtrending, is it overbought/oversold, and in some cases, the momentum of the move.
The problem with every (at least public) indicator is, even an relatively inexperienced trader such as myself can look at a chart and tell you the state of the stock with or without those indicators. There is almost nothing more than a 50/50 indicator. While some indicators definitely perform better than others in say, a trend based market, there is nobody out there at the opening bell telling you "hey today is going to be a trending day!".
So what indicators ultimately do is, it is like having another trader, with a different perspective, sitting next to you, offering his opinion on the market. This trader is no better than yourself, the only advantage he has over you is that he is always unemotional.
When your trading reach a certain level, you want total freedom, you don't want anyone, or anything telling you what to do, you develop a state of mind that tells you what will happen next. What traders mean by gut feeling is, his best guess at what the market will do next, based on the price and volume, or whatever set of indicators he uses. This gut feeling is called experience, it can not be quantified, it can not be taught, it has to be developed over time, just like an experienced cop looks at a crime scene and sees clues that a rookie will surely miss, it is not systematic, it is not written in books, because we all have to answer the same question, is it a pullback/squeeze, or is it a reversal?
For a new trader, having another "trader" (indicator) who can give you quality advice is great, and it can be more accurate than your own eyes. When you become more experienced, the indicator becomes a guide, and you override it enough times to the point it is not worth having anymore . . .
For those who use a public indicator and makes a lot of money, I think it is because they are so used to their indicators and know its weaknesses so well, to the point they know EXACTLY when to use it and when to ignore it. In reality, their trading skill is at such a level that they can probably trade just as profitably without these indicators.
Let's not forget a major drawback of all intraday indicators, when the day begins, there is no "last 10 period", the indicator lags soooooooooo much, almost completely worthless. At 10:30, when the indicator collects enough data to be effective, for many traders who favor the open, the day is almost over.
Think of indicators as katas in Karate, you use them as guidelines, in a real fight while pre-canned set of moves (say a few punches followed by an unexpected kick) can work wonders, the best fighters however will know when to use them and when to avoid them altogether.
The only FACTS in trading are price and volume, everything else, are intepretations, and for many traders, his/her own intepretation is good enough.
Buck:
Traders have one gut feeling before the market opens and another when it actually opens. Praet said around lunch time on Monday that this market will close on its lows, and it did, and many people including myself had the same feeling. Gut feeling is just one of the 50/50 indicators . . .
