Indicator nonsense

I could fill a library with the amount of effort and time I put into examining all sorts of indicators over the years. But in the interests of keeping my sanity and yours, I will give a brief demonstration of why the use of indicators will negatively effect your trading.

Excuse any typos and other errors, I have a wintery gift of a chesty bug. Doc has self prescribed Whisky for this.

A few charts of the EUR/JPY on the daily will suffice for demonstration purposes.

Here is a very common method used by both expensive online courses and so called 'secret' indicators. It is nothing more than two moving averages and the most common values are a 7/21 or 8/21 moving averages.

The people who they invented or discovered this clearly have not yet reached the age of reason or applied logical analysis to the approach. In fact the same approach has been used for many many years and in this age of electronic communication we see the same thing rehashed over and over again.

Cast your eye over the chart below and look for the three red up arrows to the right. The entire 'secret' of this method is that price gets support in the case of a bullish move off either of the moving averages. On the chart it looks plausible. As I have mentioned many times in the past, engage your logical brain and now remove said moving averages from the chart and has price still moved?

Of course it has, any moving average has a zero net effect on price and the fact of a line or lines plotted against price means price WILL and HAS moved long before the indicator paints the next part of its path. What about the rest of the chart. Can you pick out where price is either valid against a bullish pr bearish move inside the range, I cant.

In a trending market you could use a lucky rabbits foot, crystal ball or some voodoo doll and still be correct, because in trending markets everything will show it works. All indicators fail within ranges and all fail prior to a trend is established. The key is being in the market before the major move.

Lets move on to the next popular indicator, the MACD. Focus on the indicator and take note of the price swing and the indicator peaks on either side of the zero line. Note the over shoot and this is common to many other indicators too. Some use the MACD for what they like to call divergence. This is fantasy dressed up as reality. Price DOES NOT and CAN NOT diverge. It is the silly indicator that diverges from reality/truth. I tore apart the math in these indicators and I kept asking myself the same question, why does the programmer take it upon himself to more and decide some function must be made around price for his indicator to work. It makes no sense to manipulate price so that there is an error plotted in an indicator which distracts you from what you should look at, price itself.

Next up, Bollinger bands. Does anything escape?...nope!

On the above chart ignore the blue arrows, same here, these are for a later chart.

On this chart I am sure many of you will look at it and think, hmm this might work, each time price hit the lower band it showed a valid long entry until it hit the upper band. Ah, how great is life when viewed through rose tinted glasses. This is once again the trend nature of indicators which lull you into a false sense of security and you start to develop a dependency on one or more indicator that you feel has proven to work over time. Let me burst that bubble in the next chart which is also using Bollinger bands.

Lets see what different in this chart. Oh dear, the previous longs of the lower band no longer work. In fact trades taken off the upper band only work on a few occasions too. How can this be, who lied to you. The fact remains no indicator is infallible and all fall foul of reality. Ask the most basic question you can, if any indicator worked there would be no need to pay large salaries to institutional traders and computers could do it instead. Correct and also incorrect, if the market for driven purely by computers it would fail to work in a short period of time because too much logic comes into play and all the emotional driven trades and the failures of humans would no longer be there to allow all the clever tricks manipulate the market.

What?!.....you are telling us the financial markets are manipulated?...welcome to the real world!

Last chart is my own simplistic view of the market.

First up is the clear nature of the chart, although I have cluttered it with some arrows for your benefit. The red arrows are the moving average guys entries, the blue arrows are my entries and taken with the knowledge of supply/demand, support/resistance, price action and the patience to wait. Of course I would also have taken the red arrow entry (1 only) but for my style of trading they are icing on the cake and nothing more than further scaling into the position. The last two red arrows would not have been a valid entry due to price being too close to a higher time frame target and I want to be far away from that before I take a trade.

The upper blue line is higher time frame interest which has been broken and may yet act as support. Clearly is has been broken in grand style, but note the latest price action, it is slowing down and all the other indicators on the various charts are way over cooked and in cuckoo land.

If you use anything that takes price and performs some action on it that results in a new way to view price, all you do is remove yourself further and further from a key part of trading. When I trade I have nothing at all on my charts and the lines and arrows you see here are all for your benefit. The only tool I use in the cross hair to let me check if price is getting close to a price range that has peaked my interest long before price has even moved toward the price range.

In closing out the year, I wish you all seasons greetings and better trading for 2014.

Doc