the reason indicators don't work isn't because they're lagging

[nickynoes]

It can include elements of both of those, but I think more often it's because people with sub-optimal understanding of statistics and probability are attributing to indicators ill-defined "predictive" powers they don't usually have, and/or (all too commonly) they believe that indicator-"signals" will be more profitable if and when they're "confirmed" by additional indicators.

That last assumption typically rests on several misleading and inaccurate beliefs, some of which boil down to an often-subconscious (but very deeply held) and flawed assumption that higher win-rates are necessarily and intrinsically more profitable than lower win-rates. In practice, this problem tends to be exacerbated by the reality that those subscribing most firmly to this "theory" are also usually the least willing to examine the evidence to the contrary (Michael Shermer has written a lot about this).

I would just like to add that if you have read about heuristics in Van K Tharps 'Trade Your Way To Financial Freedom' the 'Lotto Bias' is very connected to peoples incorrect usage of indicators and more specifically combinations of indicators. The lotto bias states that people feel a higher confidence in their actions when they are allowed to decide something about it. Such as the period on a moving average, or picking their numbers in a lottery.

The fact that people who believe very firmly in something refuse to look at evidence to the contrary is called 'Conservatism Bias' where people seek out evidence to confirm their own 'understanding' of the market and ignore evidence that disproves it. You can definately see the same thing in politics.

 

[learner2007]

I've always looked at price movement as being the heart, and indicators as being the pulse. I'd rather have the doctor listen to my heart than just feel my pulse. Wouldn't you too?

Face it, indicators can't and don't provide the detail that's found in price movement analysis.
However, it is true that many do not have the expertise to read PM, and so indicators may be the only tools they have at hand. And for those who are too busy to do any form of detailed analysis, simple indicators may be the only answer. On the other hand there are full time traders who swear by indicators. It's such a mixed bag that who can say what's what other than the user. While most will admit that indicators aren't as accurate or as timely as PM analysis, they do what they do, and if that satisfies the user's needs, then I guess you could say that they do work for some. But to what extent they work in reading PM is another question, and, of course, will vary by indicator. Personally, I wouldn't use one of the damn things if you paid me. And I doubt that anyone who can read PM would reduce his depth of reading charts by using indicators, and that includes using them as some form of confirmation as some do.
I guess it all comes down to what level of analysis suits your needs, ability, and desires.

 

[Sprout]

Nice rule set, but if I may simplify it, it boils down to -
1) rising volume - price continues direction
2) falling volume - price reverses direction

Am I missing anything? I'd like to use this - I've never really traded volume as an indicator, but I'd like to and want to make sure I got it right. I do agree it's got some validity.

However, there are cases of high volume reversals - large stop triggers being the most obvious. How do you deal with that situation? Is it a time-frame issue, where this case happens very quickly, so it would only affect day traders?

To understand any PA, ask yourself as you are observing something, ‘what came before this?’

In the case of reversal, that would be a retrace. What is the difference in volume between a retrace and reversal?


Before the price retrace, what came before that? A Dominant Traverse, etc,..
The retroactive process can illuminate a sequence of events. Dual auction continuous markets operate on an ever-repeating sequence of events that are fractal in nature and can be applied to any timeframe.

Sometimes to clear confusion in comparing bar-by-bar, comparing and contrasting different timescales shows a clearer picture of what price is trying to do and how good it is in doing it.

Volume is aggregated. It’s productive to understand the benefits and limitations of that aggregation - what that aggregate shows and hides.

Timescale and timeframe at times can be used interchangeably but for me, there is a distinction between market-oriented time and participant-oriented time.

Price and Volume is analogous to the space-time continuum - one doesn’t exist without the other and both go through a sinusoid spiral waveform of cyclic expansion and contraction.

A guitar string doesn’t just vibrate within a two-dimensional plane. It can be represented as such. However when one shifts their point of perspective, say viewing the string from the end, it looks different and reveals a different motion in addition to what one observes the guitar string doing by looking at it’s length.

 

[nickynoes]

I've always looked at price movement as being the heart, and indicators as being the pulse. I'd rather have the doctor listen to my heart than just feel my pulse. Wouldn't you too?

Face it, indicators can't and don't provide the detail that's found in price movement analysis.
However, it is true that many do not have the expertise to read PM, and so indicators may be the only tools they have at hand. And for those who are too busy to do any form of detailed analysis, simple indicators may be the only answer. On the other hand there are full time traders who swear by indicators. It's such a mixed bag that who can say what's what other than the user. While most will admit that indicators aren't as accurate or as timely as PM, they do what they do, and if that satisfies the user's needs, then I guess you could say that they do work for some. But to what extent they work in reading PM is another question, and, of course, will vary by indicator. Personally, I wouldn't use one of the damn things if you paid me. And I doubt that anyone who can read PM would reduce his depth of reading charts by using indicators, and that includes using them as some form of confirmation as some do.
I guess it all comes down to what level of analysis suits your needs, ability, and desires.

You do realize that most indicators are based on information about the price movement? The job of an indicator is to take some information available in the market which is basically only price, momentum and volume.

When you are watching price move/candlebars forming you are visually interpretting information about the volume, momentum and price. Which is exactly what an indicator does.

The difference is that the indicator has very clear rules to follow when interpretting price and discretionary traders do not (not in the sense that they think they do).

The problem with discretionary trading is that it is very hard for traders to actually tell people what they are doing, since they are usually not even aware of it themselves, really. But both them and indicators are doing the same thing. Taking information from the market and interpretting it.

 

[learner2007]

You do realize that most indicators are based on information about the price movement?

About it , yes. About it is one thing, and the PM itself it another! Heart vs pulse!

The difference is that the indicator has very clear rules to follow when interpretting price and discretionary traders do not

Sell over 70%, buy under30%, yeah I got that. So easy. Great for some. But if you think that discretionary traders don't have rules to follow, well I just don't know what to tell ya. You might want to check that out.

The problem with discretionary trading is that it is very hard for traders to actually tell people what they are doing, since they are usually not even aware of it themselves, really.

Please don't put all discretionary traders in the same barrel.

 

[nickynoes]

About it , yes. About it is one thing, and the PM itself it another! Heart vs pulse!

Could you please define what PM means to you?

Sell over 70%, buy under30%, yeah I got that. So easy. Great for some. But if you think that discretionary traders don't have rules to follow, well I just don't know what to tell ya. You might want to check that out.

That is an expert advisor you are describing, which makes buy and sell decisions based on it's programmed rules. An indicator simply takes information from the market and outputs it in another format, it doesn't tell you when to buy or sell, that decision is up to the trader.

For example a moving average is calculated by taking the closing price (or OHLC etc) and dividing it by the chosen period/days.

When you are looking at price on a chart you are also taking the same available information and outputting it in a way that you probably could not describe since it is very subconcious.

You could probably tell me you are looking at some pattern or price movement during the day, but that would only be a small part of it and if I tried trading based on what you told me I would likely lose money.

Please don't put all discretionary traders in the same barrel.

I'm a discretionary trader myself, I believe all traders are unique wether they are discretionary or system following. But there are some things you can generalize across all traders since we are so based in human psychology.

I use rules like everyone, and I also trust my gut feel since it is based on that subconcious experience.

 

[HBC Fund]

Most traders don't get this. They say oh adx or whatever doesn't work is because it's lagging.

It doesn't work because it's not predictive.

Because an indicator does something when a trend happens or reverses or whatever doesn't mean that when the indicator does that, a trend is happening. Of course it's lagging, it does calculate based on what price did. But it has no predictive value so it's worthless.

This shocks me to say, but I think volume may actually be a predictive indicator. In some cases.

Do remember, a lot of indicators don't work 100% for trading is because the markets a rigged in favour of the banks and institutions, they want you to use indicators like the holy grail as they know technicals are not much good UNLESS you use them in conjunction with fundamental analysis.

 

[nickynoes]

Doesn't work = sub-optimal = not long-term profitable (usually) = No edge

When an indicator doesn't earn money in the long run, which you define as having no edge, is that the fault of the indicator itself or the traders application of it?

Long term proftiability has much less to do with the indicator you use to make entries and exits and more to do with position sizing and risk management.

 

[lovethetrade]

When an indicator doesn't earn money in the long run, which you define as having no edge, is that the fault of the indicator itself or the traders application of it?

Long term proftiability has much less to do with the indicator you use to make entries and exits and more to do with position sizing and risk management.

I retracted my post and you answered your own question.

 

[lovethetrade]

What about a thread "The reason indicators dont work: Stochastics - A Case Study."

That way we can discuss it in detail without the generalisations and look specifically at what Stochastics does, how it is correctly used and why it doesn't work.