When I first looked at indicators, I honestly didn’t know why people say this is a lagging indicator and this is a leading indicator. Then there is this negative divergence and this is positive divergence. When you compare candle to candle, it is very clear to the novice, they are all lagging. And seriously, it is right.
When it comes to indicators, people look to them to predict the next move. Holy Grailers want their indicators to tell them to buy or sell. To do the trading for them. So much faith is placed on custom indicators it has become big business. I think people who rely only on their indicators, perpetuate their ignorance. For the most part, ignorance is not bliss in the market. The problem is not the tool. It is the user of the tool. The other problem, the user doesn’t know how his/her indicator relates to the price action. Beyond the obvious. I say this because, in order for you indicators to work, it considers the same incoming data to produce your candles. The underlying. People just take things at face value without really understanding the why. The why is always left to divergences.
Divergences are true enough but it doesn’t explain to you the why. Ever wonder why you don’t have faith in what you see? I’m a bit of a quant. I like to know the underlying.
Many people who have tried to understand how to use indicators have failed miserably. There is no faith into them primarily because, their use of indicators is casual empirical. The other reason why they fail. They don’t understand how to relate them to other timeframes. Effective use of comparative analysis.
To compensate, people use multiple indicators. They go from 1-2 indicators to 50. Ever wonder why the carpets in the casinos have busy patterns? Visual stimulation. Mixes in with the beeping noises and flashing lights and keeps you thinking of playing the game. Too much visual stimulation is death by indicators. Paralysis analysis. Really all you need is 1-2 if any at all. But that depends on the person. Like I said, I’m a bit of a quant and I like to see the underlying.
Why indicators work
It is really silly to say that indicators do not work. Not to offend some of my mentors who don’t really care for them, but for me, based on how I’ve come to realize how indicators work. Based on my understanding, it is the same thing as using candles. The reason is, they both use the same data to produce their graphical representation. Applying effective comparative analysis, provides you the same reads, not price based, as if you are using candles. The difference is how the indicators represent the market.
People make things more difficult than what they really are. There are only 2 things that result in the intrinsic value that we know as price. Buy/Sell. Bull/Bear. 1/0. On/Off. Extrinsic is supply and demand. Don’t really care about them. People know them as oversold, over bought. But those 2 extrinsic entities are relative. Relative to the timeframe. Don’t really care to know them. Cut it out from your considerations and simplify your decision making to – accumulation and distribution.
The difference in how indicators represent the market is the key to why they are known as momentum indicators. You see the real idea that indicators came to be, is to describe a non-price base representation of the market. In the same manner that people try to understand trend in the market via candles, is the same way these momentum indicators work. The failure. Comparative analysis.
All indicators are lagging. Through comparative analysis, they become leading. What separates a pro trader from a novice. They know the trend. If trend applies to your candles and chart patterns, why don’t they apply to your indicators? They use the same data!
You got the hook from this article. There are a lot to consider from here on out. I refuse to hold your hand. Think about it and apply what I’m leading you to understand. Cast your ego aside and open your mind to what you thought was originally not possible. Logically what I’m suggesting is true. Do you remember the scientific procedures you learned in 3rd grade? Well I learned them in 3rd grade. Casual empirical is lazy. You don’t need to be a rocket scientist to understand what I’m eluding to. It is so basic. When you get it. You will laugh.