When I learned to ride a bike, like many people, I used training wheels. Training wheels are great for simulating a real ride without letting you fall. Some indicators are like training wheels. For me, they were the linear regression channel, fibonacci and ema’s. I used ema’s because I found them more relevant to intraday trading. The point is to help you understand how to evaluate indicators and then use them till you find something better or you gain a stronger understanding so you can shed some of your clutter in your trading desktop. Some people though, really like looking at all kinds of indicators.
Some trading systems rely completely on indicators. They have a system that they adhere to. If you take away those indicators, these people are less likely to know what to do. Some of these groups are cult like. A lot of these people are holy grailers. But it is a system that works if you follow it specifically. The problem with some of these indicators base systems is that they will have weaknesses and they are taught that there are some things the feds or whatever is the cause of the failure. There are pros and cons to systems like these. And if and when they come about, to teach these people the real reason why things work the way they do, is to admit a weakness in the system it self, or they will have to actually teach people how to read charts properly, potentially negating the need to use their indicators. Part of the problem is, most people are too thick and impatient to teach. Being thick isn’t too bad if you have great work ethic and persistence. But being thick and impatient and only want shortcuts, easier to thread a camel through the eye of a needle. So best thing…get them on the indicators.
I’m not gonna knock the value and effectiveness of indicators. All indicators are a work of art in their own right. I always saw indicators as a way to enhance my ability to see how the market moves. If you are anything like me, you would like to know what actually makes the indicators work. So I know what it really means when they do things. For those indicator systems, that is not necessary. They talk about certain “shortcuts” that will help them know what to do. Those shortcuts are generally some pattern. I know, because I traded primarily as a momentum trader, and I developed a series of visual cues that helped me and I still use to this very day.
There are generally 2 types of indicators. One are called upper studies and the other lower studies. Many lower studies are really used for momentum readers. Generally, most of these lower studies are a variant of macd and stochastic lines. What they do is combine them and specify different settings to mimic reads that can provide the view of lines produced in adjacent lower time frames and adjacent higher time frames. If you have multiple complimentary time frames open to you during the trading session, you could probably un-clutter your mind as well as your view by going to the root study itself. But only if you understand how to stitch your time frames together through the use of indicators. If you look at some of these indicators, you will see how they take 1 or both the lines of the macd and combine it with another line like a stochastic line.
Some like the macd can also be classified as upper studies. The macd becomes, simple moving average or exponential moving average. In this form they become support/resistance lines. Many upper studies are used for these specifically. POC, Pivots, fibs regression channels. All are used as s/r points. The only one in that list that doesn’t really fit because of how it is calculated, are fibs. Fibs is a product of math magic. Some upper studies like bollinger lines are a combination of S/R and momentum indicators. They contract and expand and clue you in on what is developing. You see these are predictive nature of momentum indicators. The totally uneducated don’t really believe in predictive nature of the market and yet they like to use lagging and leading indicators. How do those indicators work as predictive? Through progression. You can’t trade technically if you are still thinking of funnymentals. Tonight many people are waiting on China report.
Upper studies are studies that can float along with the candles. What do they really do? What do you want to know most from your upper studies? You want them to tell you where support and resistance lines are. These studies are definitely “training wheels”. Why? If you progress as a trader, you should be able to understand how to get these levels of support and resistance on your own. Many people don’t even take the time to understand how these indicators produce these numbers. The only upper studies that I would not expect a trader to explain to me how these lines are produced are regression channels, (but you can surmise how), bollinger, and definitely not fibs, unless you are a math nut.
What I’ve noticed about using these training wheels, not many know how to interpret them in relation to a longer progression. I’ve read an awesome book on fibos, produced by Bloomberg, and these guys know how to do it right. But the book is heavy into the math and may lose some people. I have never seen many people use them properly. What happens really is that you are too focused in on that one area that they will become baffled why it broke through some of their lines. With fibos, its hard to screw it up. But I’ve seen people talk about pomo’s and feds screwing with the market as the reason why their fibos failed. If you are one of those people, you still need to learn more. Is this the state you really want to stay in, dependent on indicator and still under the mercy of funnymentals? This is where many people who are dependent on indicators for their analysis fail. Many when faced with bad reads, blame things external to the techs. Why? Because they really don’t know how to read charts.
If you are one of the few who can do with or without, then it becomes a question of preference. But for me, less is more. Do I still use regression channels, fibos and ema’s? No. I know how to find levels of support and resistance. I know legs, how price action moves up and down levels and how they relate to a larger progression. And finally I can read momentum. It took time to get there, but when you get to that point, you will see with much more clarity than before.
Get rid of some of your training wheels. By gaining better understanding of your techs.