| Author |
Message |
     jross
Member
Username: jross
Post Number: 7
Registered: 03-2004Rating: 
Votes: 5
|
| | Friday, April 02, 2004 - 03:08 am: |  
|
Once a person understands price-bar action it is possible SAFELY say that indicators do virtually nothing! As a matter of fact I have on many occasions successfully sold short while more than one indicator was oversold.
The problem with indicators is that contrary to what some may say about them “leading” the market, the truth is that no indicator can really lead any market. An indicator can only register after the fact, never before.
I have consistently been against the wrong use of indicators. Indicators can be useful in revealing something that is difficult to see just viewing a chart. For example, Bollinger Bands reveal the location of two Standard Deviations, which is rather difficult to see just looking at a chart. An indicator can confirm what is seen on the chart.
However, most traders use indicators in a wrong way. For example, I have seen traders use RSI to confirm what they see with Stochastics. Doing that reveals a complete misunderstanding of how an indicator can be used. RSI, Momentum, %R, Stochastics, DEMA, MACD, and MACD Histogram all are measures of momentum. How can one confirm the other when they are all measuring the same thing? What you need for confirmation is something that measures volatility, as do Bollinger Bands, or something that measures volume for confirmation of momentum and price action.
Like most people, I had to fool with and play around with indicators. But I gave them up after a short time and went back to the way I originally traded – without them. Once you're in, the whole trade becomes a matter of management. All an entry method can possibly do for you is to help you be on the right side of a trade at entry. After that, it is all management. Who knows where the next tick will be???
Barry Lind (Lind-Waldock) once did a study showing that 80% of traders were on the right side of a trade at entry. He wondered, then, why 90% lost. I don't know if he ever figured it out, but I did. The problem was management – or the lack of it.
-----------------------
This article was contributed by Joe Ross
|
stevo
Member
Username: stevo
Post Number: 140
Registered: 01-2003Rating: 
Votes: 2
|
| | Friday, April 02, 2004 - 01:59 pm: |
|
Believing "leading" indicators is a recipe for disaster - it took me a while to figure that out!
I have found that I am better buying when the momentum indicator is "overbought" and selling when it is "oversold". Simple Momentum and Rate of change indicators can show strength in the market and, I believe, are more useful when used in this manner.
Management comes into play before the trade is even taken in determining how many dollars to risk on each trade. Position sizing, combined with exit strategies are all I can really control on each trade.
stevo
|
riddler
Member
Username: riddler
Post Number: 84
Registered: 11-2002Rating: N/A
Votes: 0
|
| | Saturday, April 03, 2004 - 10:22 am: |
|
I think indicators are most useful in selling software. Which ever one(s) you use, if it is not more reliable than 50% of the time you are better off flipping a coin. For me, rsi divergence scores the best.
r
|
williamat
Member
Username: williamat
Post Number: 216
Registered: 09-2002Rating: N/A
Votes: 0
|
| | Monday, April 05, 2004 - 11:28 am: |
|
I guess we are putting a finer point as it were.
Joe Ross, I am in no position to argue and therefore quote:- ELDER: Trading for a Living. P 120 wherein he refers to MACD as trend follower and Slow Stochastic as Oscillator, which can often turn ahead of prices.
While there is more to entry signals than indicators, I use searches for SS crossovers and MACD crossovers, as separate searches.
Respctfully and out of interest: could you describe for me "Price-bar Action. It's a new one for me.
Good Wishes and thanks for arousing me into thought. Bill.
The difference between intelligence and education is this- intelligence will make you a good living. Charles C Kettering.
|
jross
Member
Username: jross
Post Number: 8
Registered: 03-2004Rating: 
Votes: 1
|
| | Thursday, April 08, 2004 - 06:22 am: |
|
Hi Bill,
Price bar action is chart reading. Looking at the individual price bars to see what each one reveals. The price bar contains the most complete and accurate statement of what is currently going on with price. Learning to read that action to see what is actually revealed is for example, picture a daily price bar that looks like the following:
High is at 55 and low is at 25. Open is at 35 and Close is at 50. Go ahead and draw it
What can you tell me about this price bar? How would you characterize what took place that day, assuming this is a daily bar.
You should be able to name at least half a dozen things that this bar reveals. Can you name them? Think a bit before you answer. My answers are below, but you shouldn’t peek until you’ve thought for awhile.
Here are my answers, there may be more:
1. Prices were in a trading range between the high and the
low.
2. There was volatility that day. It can be measured as
the arithmetic difference between the high and the low.
3. There was momentum.
4. There was both buying and selling.
5. Buying pressure was greater than selling pressure, thus
forcing prices up. The bulls won over the bears.
6. There was liquidity to the extent that people were
buying and selling.
7. There was volume.
Speaking of A. Elder, I see you may have fallen for his doublespeak. MACD and Stochastics are both measured of momentum. Since they both measure the same thing only in slightly different ways how can one be a “leading” indicator and the other one not be leading?
Another question: Since no indicator can possibly register its final result until a price bar is complete, how can any indicator possible lead the price action?
All the best,
JR
|
deanrosario
Member
Username: deanrosario
Post Number: 254
Registered: 11-2002Rating: N/A
Votes: 0
|
| | Friday, April 09, 2004 - 12:53 am: |
|
Hi JR
I really enjoy reading your views on trading - I too try to keep it very simple.
Just a couple of things in relation to your example above ..
(a) how do you know there was volume? I know it is unlikely, but, in theory, there could have been 4 trades all day for 1 share at the open, high, low and closing price, or have I missed something?
(b) same goes for liquidity and volatility - without the intraday chart or course of trades, how can we be sure that prices were not basically trading around one price with the odd trade at the open, high, low, close?
Interested in your thoughts - especially your views on the importance, or unimportance, of volume when taking a position.
Regards - and keep up the postings they are very useful!
Dean
|
jross
Member
Username: jross
Post Number: 9
Registered: 03-2004Rating: N/A
Votes: 0
|
| | Friday, April 09, 2004 - 05:13 am: |
|
Hi Dean,
I know there was volume, I just don’t know what it was. You are right there could have been only 4 trades, in which case volume was 4 J
As for liquidity, there had to have been some. You can see that prices changed direction at least 3 times. Liquidity is made up of two things: volume + participation.
If there were only 4 trades, then we had both volume and participation. Therefore we had liquidity.
Volatility in the case of a single bar is the arithmetic difference between the high and low. We had a high and a low, therefore we had volatility.
In the cases of volume and liquidity, I do not know how much there was, unless I had some number for volume. But as far as liquidity is concerned, I never know how much there was. Liquidity means buyers are hitting the offer and sellers are hitting the bid. Does any one ever know how liquid a market is? Only if you know both – volume and how many participants were actually trading.
Is volume important when trading? I believe it is. If I’m trading the e-mini S&P I like to see contract volume of at least 3,000 contracts/minute. I also like to see tick volume of at least 160 ticks/minute. When I see that, I assume participation is good and liquidity is also good. For the e-mini Nasdaq, I like to see 1,000 contracts/minute and 140 ticks/minute. All of the above are subject to adjustment from time to time. What I’m really looking for is how much in the way of movement size am I getting at those volume numbers. In other words, if S&P mini is consistently getting good momentum with tick volume a only 100/minute and contract volume at only 1,000/minute, I would lower my volume target and say, “that’s good enough for me.”
Keep well,
Joe Ross
|
deanrosario
Member
Username: deanrosario
Post Number: 255
Registered: 11-2002Rating: N/A
Votes: 0
|
| | Friday, April 09, 2004 - 09:25 am: |
|
Thanks for the explanation, Joe.
I now understand the point you were trying to make with the example - that the plethora of price indicators do no more than provide a picture of information that is contained in the PRICE BAR.
I too use a similar metric of "volume traded per minute", to assess "interest" in a stock at any particular time.
Best wishes for Easter.
Dean
|
david_louisson
Member
Username: david_louisson
Post Number: 6
Registered: 02-2004Rating: N/A
Votes: 0
|
| | Saturday, April 17, 2004 - 12:56 am: |
|
Hi Joe
Great post, I totally agree. All indicators are ultimately derived from raw price bar data.
The only practical use I’ve found for indicators is where they can summarize aspects of the OHLCV bars that might not be immediately obvious at first glance. For example, a custom indicator that weights several comparisons between yesterday’s and today’s price bars (I am an aspiring short term trader), and then displays the consolidated result as a single value. Like other indicators, moving averages can be used to visually summarize the events of the previous ‘n’ days, but the longer the period, the greater the introduced obsolescence (‘lag’).
With all indicators, one has the additional problem of how to arbitrarily ‘calibrate’ them (i.e. assign parameters to best fit their curve around the changing cyclical patterns of the market). Many traders seem to simply use the default values supplied by the software retailer, regardless of the stock, the instrument, or the timeframe, that they are seeking to trade.
Indicators derived from the same OHLC values do not confirm each other, or increase the probability that a trade will succeed. Confirmation is subject to two entities being of independent origin. If the OHLC values rise, for example, then this must necessarily trigger rises in all OHLC-based indicators according to their construction, and calibration.
The most reliable signals I’ve found (for picking short term price reversals) are changes in the price bar ‘storyline’ and direction, and their position relative to simple channels based on (adaptively calibrated) standard deviations and prior support/resistance.
Cheers
David Louisson
Hamilton, New Zealand
|
hilarius
Member
Username: hilarius
Post Number: 32
Registered: 04-2004Rating: N/A
Votes: 0
|
| | Saturday, April 17, 2004 - 09:58 am: |
|
Good Morning David
(I say this realising that you have already beaten us to the afternoon showing once again what a progressive nation you inhabit)
Wormald proposes that many (if not all) stocks have dominant angles, and that future price slopes will mimic past ones.
Do you give this any credence?
With Best Wishes
Hilarius (a humble friar)
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
|
andrewk
Member
Username: andrewk
Post Number: 121
Registered: 09-2003Rating: N/A
Votes: 0
|
| | Sunday, April 18, 2004 - 01:40 am: |
|
Posted by david louisson:
The only practical use I’ve found for indicators is where they can summarize aspects of the OHLCV bars that might not be immediately obvious at first glance.
Exactly.
Love them or hate them, that is the point. Realistically, you need some sort of leading indicator to tell you when you should enter a trade. Whether this is derived from subconscious analysis of price-bar action, or simply a quick glance at a price or volume derived indicator. The key to using indicators is to understand what they are really telling you. To simply say *insert indicator name here* is telling me to buy/sell/hold whatever without understanding why will of course lead to trouble. In the same way it is possible to successfully trade by simply watching price movements, it is technically possible to successfully trade just by using a single indicator.
I can't say I personally use them, but that does not mean they cannot be useful.
"We are generally the better persuaded by the reasons we discover ourselves than by those given to us by others." - Blaise Pascal
|
hilarius
Member
Username: hilarius
Post Number: 34
Registered: 04-2004Rating: N/A
Votes: 0
|
| | Sunday, April 18, 2004 - 07:27 am: |
|
Good Morning
I think David Louisson's messages have been outstanding for their clarity of expression, and I totally agree with his conclusion that indicators clarify past market action by highlighting aspects of price behaviour visually, in a way which may not be obvious from a table of data.
I believe it would add value to the discussion if we were to clarify what is meant by a "leading" indicator.
As a humble friar searching every dark corner with his candle for new insights (not to mention the Holy Grail) I would be interested to know what "leading" means.
I do know what "lagging" means ... and I can best summarise it by saying that a 150 point indicator lags by more than a 30 point indicator ... because the 150 point based indicator reviews a longer period of past data. Like the QE2 it takes longer to turn than a small sailing dinghy, that is to say it lags in its response to changing conditions.
The direct opposite of a lagging indicator might then be a BF entry as defined by Rocky ... which uses as its basis only the most recent action within the single latest day and perhaps 3 recent days to draw a conclusion.
Day traders will be even more sensitised to recent data by using intra-day 1 minute charts.
This, however, still does not seem to get to the essence of the term "leading".
Economists use this term when observing past data that signals new emerging future levels of activity ... or in other words they seek to find in recent current data (eg phone connections, new car sales, retail sales etc, bank lending, confidence indices etc) signs of a reviving or slowing economy.
In short they are seeking to find in recent data indications of new trends.
It seems to me that share traders fall into 2 categories :-
(1) Those who believe that certain patterns or trends have a higher than 50/50 tendency to continue in a certain direction into the future ... and are thus tradable signals
(2) Those who believe that the market is so chaotic and random that it is never possible to deduce future moves from past data and thus their entire focus must be on money management.
In the second case a share list pinned to a dartboard and the throwing of a dart would be as useful a method of selection as any other. There would be no need to study charts for clues.
So I am interested to see who is in each group of selection method :-
(1) Those who believe past data does create patterns that offer better than average clues to the future
(2) Those who believe that nothing can be reliably deduced from past price action
Note that I am discussing here the selection process ... not the post entry management process.
While I wait for the wisdom and clarity of the Forum I shall return to my monastery duties. Hopefully I will also have a little time to read my texts on trading with my trusty candle while quietly humming to myself "Lead Kindly Light" [Source: Hymns Ancient and Modern]
With Best Wishes
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
|
| |
Home
Site Map
About Us
Careers
Advertise
Contact Us