Divergences: Indicators?

[newtrader 10]

Ive read alot on this forum about indicators being useless. However, I do think price and indicator divergence signals can be taken as a powerful trading signal.

 

If divergences such as RSI and MACD offers trading opportunities, why dont you guys use them? Thanks

[Soultrader 12]

I agree to some extent that price and indicator divergence can create trading opportunities. But I trade better without it. Its up to you newtrader whether you want to rely on them or not.

[carter 10]

Cuz they suck. lol

[Dr Who 10]

Ive read alot on this forum about indicators being useless. However, I do think price and indicator divergence signals can be taken as a powerful trading signal.

 

If divergences such as RSI and MACD offers trading opportunities, why dont you guys use them? Thanks

 

Simply looking at divergences doesn't tell you WHY? Employing other methods at least gives you more insight. MACD tells you what price tells you as does RSI. Looking at divergences is like looking at a newspaper without taking it all in - sense my analogy? The talk is there, but what is in the talk? Tape reading helps.

[ant 10]

I agree that divergences can provide powerful signals when used properly (e.g., divergences should be ignored in strong trends) and I certainly look for them as price approaches key reference points. I don't have a problem with indicators provided that the trader does not make decisions based on those lagging indicators. However, using indicators to see what is already in the chart is not a bad way to use them. In other words, using them as a "crutch for the eye" is one way of putting them to good use because sometimes it is easier to see pattern formations in an indicator then in a chart, but keep in mind that those signals/patterns are already present in the price action. For example, how does price behave when a divergence is being formed? Well, in an uptrend, the subsequent upswings get shorter and shorter indicating a loss of momentum. Another way to put it is that price goes up less points on each subsequent upswing or it takes more bars to cover the same distance as the previous swing. You really don't need an indicator to see this. I primarily analyze price action and use market internals (Tick, volume, bid/ask) to look for divergences. Basically, I trade market development and market structure using the Market Profile graphic.

 

The problem I see with traders and indicators is that traders tend to spend way too much time focusing on which indicators to use and tweaking indicator parameters thinking that the "perfect" indicator and indicator settings will be the key to a profitable trading. This is the wrong path to successful trading, IMO. Most traders use indicators and most traders fail. If you want to succeed you need to do something different then the majority of traders. Most traders, I believe, use indicators because they want green light/red light signals and don't want to think for themselves.

 

Once I removed indicators from my charts, I started to focus on more important things, such as reading price action, understanding how the markets I trade move, focusing on risk/reward and money management, determining whether buyers or sellers are stronger, and identifying where the longer-timeframe players are jumping into the market. The point I'm trying to make is that indicators only "indicate" what is already in the price and one should learn to read price action before starting to rely on indicators. I believe that when traders learn to interpret price action, traders will realize that indicators are useless for the most part. I believe focusing on market-generated information, instead of indicators (which are a derivative of price), is essential for developing a robust and sound trading methodology that will withstand the test of time.

[Soultrader 12]

Very nicely said ant. Ive been receiving alot of critiscm in other forums everytime I mention how indicators are useless.

 

I am 100% with you all the way. Indicators are USELESS. There I said it.... this is official. The fact that traders are able to trade with price only proves how useless indicators are.

 

I believe focusing on market-generated information, instead of indicators (which are a derivative of price), is essential for developing a robust and sound trading methodology that will withstand the test of time.

 

AMEN!

[tortoise 10]

Indicators are signal processing. That's it. Signal processing is useful, so long as you're clear on the signal being processed.

 

I began trading as an indicator junkie. Later, I came to see indicators as "useless" and relied on price action/market internals alone. Then, as my understanding of market dynamics deepened, I brought a couple of indicators into the picture. I have found them, most assuredly, "useful".

 

But...

 

I use them now with the understanding of what they are and what they are NOT.

 

What they are -- visual representations of signal processing algorithms

 

What they are NOT -- substitutes for a thorough understanding of what's really going on.

[torero 10]

Why go to middleman when you get to the source itself? Most indicators are based on price. Understand price action first then you can understand when and when not to use indicators because from price, you know how indicator behaves and why.

 

An analogy, if you understand Spanish and someone is speaking to you in Spanish, would you get an interpreter in and have him interpret to you what he says or would you just listen to him directly?

[Soultrader 12]

Totally agree with you guys..... but its almost impossible to convince indicator based traders that price action is the holy grail. Its like a religion... traders find it hard to convert.

 

I had a discussion a few weeks ago and openly stated how indicators are useles. The response I received was unbelievable. Traders were actually defending their unprofitable systems!

[Kiwi 16]

I wouldn't agree that indicators are worthless. I would agree that believing that your indicator is telling you the "whole truth" is a less than optimal strategy.

 

I use two indicators ... I have emas on my main entry chart and I have the same emas plus a cci mapped onto my short term exit and "fine tuned entry" chart.

 

The emas are selected because over a long period of time (several years now) they have been support in weakly and strongly trending markets. Watch the markets: if you can find emas that create support in a trend and help you too see when the trend has changed then they are useful.

 

For me they help me see that a retracement is "sufficient" and thus likely to end before the "trend" resumes. They also help me see when the retracement is probably reversal but there is a mix of ema and price behaviour required to convince me of this.

 

The CCI I use for one thing only. I count short term thrusts and when the third thrust or one that corresponds with prior highs or lows is divergent I look for a price action based exit. Thats all ... it works for me.

 

 

Edit: The use of indicators doesn't preclude the use of price action/support resistance to fine tune entries. Also the CCI will show divergence not visible in pure price action because the CCI's normalizing function takes into account the recent range - but like everything in discretionary trading you have to figure out what will work for you.

[torero 10]

It all comes back to price action and chart reading. Many cannot differentiate between a trend, strong trend, weak trend, or trendless ranges. Understand these differences requires chart reading skills. So if they can't identify the differences, there lies the problems for indicators. Indicators works but only when the market is optimal for them.

 

I've tested many trading systems based on indicators alone or combined, the results are not decent enough to even take it to the next level, no matter how much optimization is tested (changing the indicator parameters), win/loss ratio is between 20-40% (40% is considered good if the avg win is at least 2x the avg loss). These work best in daily or higher but practically everything works better in daily or higher timeframes. Incorporate price recognition logic increases the percentage because the entry and exit execution is more precise.

[namstrader 10]

Kiwi,

 

I am so glad you have joined this forum. I have read your posts for over a year at other sites and your shared comments have been very informative and useful.

 

Thanks for your sharing.

 

Namstrader

[ezduzzit 10]

GRrrrrrrrrrrrrrr....

 

I must say that in reading this thread I was surprised at the tone expressed by some as they voiced their own personal opinions on how one way is, at least to them, clearly superior to another, especially as though that should mean it would be true for others. It seems that some people feel strongly that they have somehow reached another level in their trading that clearly most traders should aspire to. Well, don't you believe it. If you have been around in Life as long as I have then you have almost certainly been smacked in the face again and again with the fact that one man's meat is another man's poison and that what works for one often doesn't work at all for another.

 

You can safely assume as fact that some people trade better with indicators and some trade better with watching pure price action, while yet others trade better with a smattering of both. Opinions one way or the other don't change that one iota so don't ever accept other trader's "opinions" to the contrary. Opinions are pretty much like derrieres (your posterior heh, heh) and pretty much everybody has one.

 

Some traders may think they have "graduated" beyond the need for indicators and that is fine as there is plenty of room in the markets for all types. There is no such thing as a pure best method of trading no matter how much some may wish to protest to the contrary. What is reality? Reality for any particular person is the result of how that particular person experiences Life events. It is based upon their own unique ways of processing information through the filters of their own life experience, opinions and already formed beliefs. The self same events may be processed quite differently by another person of a different background, culture or belief structure and thus one person's view on something external to them is nothing more than their opinion.

 

Does that make it the right way to go for you and will you receive the same results and experience that others are claiming from following the same methods or practice? The answer is often "absolutely not". Does that mean that their opinions don't hold value, at least to them and possibly even to you? Not at all, but I would first and foremost suggest you never accept any of it as absolute truth and that you simply try it out for yourself (if you wish to do so) and see if it holds up in your own experience. You may be surprised to find that you get very different or even quite opposite results. That is what makes Life interesting, otherwise the whole experience here on Earth would be boring as heck!

 

So that I don't get wildly criticized here for not taking at least some type of stand, let me just say that my own personal experiences tell me that indicators can be useful to me (not necessarily for others, as they have to experiment for themselves.) However, I tend to use them for easily and quickly determing the tone or trend of the market at a single glance. When I focus on price or especially on tape reading, I can often get so caught up in the nitty gritty moment to moment action and spread of the range that I sometimes forget the overall trend in the period I am trading and in the next confirmation time period I am using), but I personally do not use them as actual trading signals. As I pointed out in another recent post, it is my personal opinion that constantly looking in your rearview mirror is a most challenging and inefficient way of driving down the street without having a major accident. I guess that is my personal way of saying that lagging indicators, even if they are enhanced and smoothed and only lagging minutely, are often good to spot trend and tone of the market and for those that need it, even confirmation of price action, but could prove somewhat hazardous to your trading if used as the actual signals to take trades. To my way of thinking, that last comment is far more accurate for daytraders than for position or swing traders but I had best let those types of traders speak for themselves.

 

Having said that, I can tell you I have a few trading buddies who say they have removed all their indicators and say they rely purely on price action. Well, in competition, we are almost dead even on who consistently takes the most points out of the market on a consistent basis. If you haven't figured it out yet, trading is about a great deal more than whether you mostly follow price action, indicators or both.

 

However, all is not lost! You can still have a good laugh when the price action folks try to persuade you to their side of the fence, especially when you realize that VAL, VAH, POC (point of control), Balance Lines, Dual Purpose Trend Lines, Floor Pivots or Support and Resistance Lines,etc. are all indicators of sorts and yes, they depend on them as much as you do on your own indicators, whatever those may be. So have a nice little chuckle inside and then go on about your trading.

 

Again, never accept any trader's pronouncements (or even those of a group of traders who agree) as the final edict on the best way to do something, not even if it is a famous trading guru and certainly not just from traders in some online forum (me included!) Find what works for you personally and then trade it tenaciously, never letting anyone shake your faith in something as long as it continues to perform.

 

Happy Trading

[torero 10]

I totally agree. Shouldn't listen to anyone without doing your own homework to verify it or not. It's my opinion, and it's only ONE opinion, so shouldn't take mine as is. I only emphasized that learning to read charts is important. I am not dissing indicators at all. I myself use a few indicators. They work better if a trader understand how price action works before applying them. At least understand how the formula of the indicator work before trading it if he's doesn't want to learn to read charts. Say, if a trader knows that oscillators work well only in range-bound markets, then he's already got a foundation of understanding in chart reading for that particular indicators.

[wrines 10]

I find it odd when some people claim "indicators" do or do not "work". I also find it odd when I hear some people claim they dont use "any" indicators. If you use ANYTHING other than tape of the security you are trading, you ARE using indicators, as was just mentioned. Now, as for whether or not they "work", that depends on what you mean - lots of indicators "work", but the caveat is that everything is dependent on the underlying data they are based on. If they are BASED on price (past price obviously), then they WILL LAG THAT DATA, no matter how they are computed, and so I understand, and to some extent agree with those that find it cleaner and simpler and most importantly, most timely, to just be rid of them and use price alone. For those that hope lagging indicators will forecast future movement, they are often WRONG, which typically negates any edge the trader has on the occasions when they DO forecast correctly future movement, hence most traders LOSE MONEY.

Having said that, I do see the value of using some indicators if they help to visually explain what HAS happened, in the past (which is of dubious merit, IMO). On the other hand, using indicators such as POC/VAL/VAH and pivots do not LAG prices even though they are calculated on past data, and therefore can at times be useful to support or confirm the trades based on price data. More useful than indicators BASED on current prices that are then intended to forecast future movement. Just my 2 cents.

W

[ezduzzit 10]

Hmmm... good points Wrines...

 

It is amazing to me that traders are still wasting their time trying to "forecast" the next movement rather than simply going with the flow. I daresay most traders couldn't even tell you from moment to moment if the trend has really even changed or not. I say, learn to become a master of the obvious. The support and resistance type indicators mentioned seem more "predictive" simply because of two things:

 

1. History tends to repeat itself to some degree; and

2. Big traders are often on the sidelines for a good period of time and they are there for a reason. They have key points at which they will enter the market (and if you want to know where those areas are, simply study a market profile or volume profile chart for recent periods.)

 

To my way of thinking, that is more than sufficient reason to pay serious attention to those types of indicators. Again, just my opinion and nothing more.

 

Happy Trading

[Soultrader 12]

Very true ez. This is why the markets move from one key price level to the next. The markets will never reverse at a random location. They reverse at levels where the big boys are simply looking to buy or sell.

 

When using pit noise, sometimes you will hear about a top tenner (one of the top ten biggest floor traders) fighting the entire market. I will often get on his side and fight with him. I have seen more right than wrong from these big players.

[Kiwi 16]

Darn,

 

You've got my attention again. We are in two of the (imho) silly loops that we keep getting into in trading arguments. Loop 1 is the predict/don't predict argument. Loop 2 is the lagging/leading argument.

 

To a degree both are rubbish. To a degree both seem to be "more experienced (??)" traders getting frustrated with misconceptions less experienced traders display. In particular the hope that anything will give you certainty, and that more things will give you more certainty.

 

The way I, personally, display this problem is trying to apply volume, market profile, market delta, volume momentum or anything but price derived data to the HSI. I am searching for a better probability of being right (instead of just trading with the probabilities I get from my method).

 

So lets attack the misconceptions (and hopefully not make enemies while I do but it won't be the first time if I do):

 

1) Predict/Don't predict.

 

predict

v 1: make a prediction about; tell in advance; "Call the outcome

of an election" [syn: foretell, prognosticate, call,

forebode, anticipate, promise]

2: indicate by signs; "These signs bode bad news"

 

Everything we do in choosing our entries and exits is about predicting. If you buy at the bounce on the LVA you are predicting that there is a high probability that you will move down X before you retrace Y and thus the trade will have a certain win ratio and win/loss that gives a good expectancy. You are predicting. What you are not doing (I hope) is making the beginners mistake of assuming that there is a certainty associated with the prediction.

 

Similarly when I see price bounce of a carefully chosen ma after making (say) only 2 thrusts away from the ma I am predicting continuation (x% chance based on history) and thus enter a trade. A second bounce of the same MA may have a higher or lower probability and thus may cause me to increase my bet size or lower it.

 

Even going with the flow is forecasting. We forecast that if its flowing up now then it will keep going up for Y with a risk of X.

 

But lets be realistic; if we analyse price and volume, we then predict a probable outcome. Similarly at exit time we exit because the probability of continuation drops below a certain level.

 

2) Leading vs Lagging.

If you smooth data to build an indicator then the data will have lag built in - and T3 mas, hull mas, and jurik everthings are an attempt to use better signal processing algorithms to get more smoothing for a given time shift in the output (lag).

 

But. CCI's don't lag the data because the prime determinant of the output is the current price of the current bar.

 

But. It doesn't really matter anyway for many forms of discretionary trading whether there is a lag in the indicator or not. Its whether there is a lag in the usage of the indicator. For example, EMAs have plenty of lag. But I don't care because I use an ema the same way you use a POC ... its support and resistance and as support and resistance it has no lag. The ema represents in real time with no lag exactly what every other trader looking at it as support and resistance sees so if price reacts appropriately at the ema (or the cci does) then I react without lag to reality.

 

But. Pure price can have lag. If you buy support then thats "zero lag." If you wait for it to reject support thats lag. If you wait for it to form a double bottom at support thats more lag (vs just buying). So even in pure price trading you have lag and the lag is a trade off of increased certainly for time and probably position.

 

 

So IMO predicting is what we do. What we must understand is that every prediction has a probability of being wrong so we must have an exit when its wrong and we must really understand that its probabilistic. The enemy is false confidence (and resulting disillusionment) not prediction.

 

And how bad is lag. This is a game of predicting and probabilities and risk vs reward. We trade two types of risk: risk of being wrong vs risk that when we're wrong we give more back. What do I mean by that? If you buy at the ema with a 3 pt stop you might have a 50% chance of being wrong but only risk 3pts to find out. If you buy after price forms a rejection pattern from the ema you may need to use a 7 point stop but have only a 30% chance that you are wrong. The second had lag but in return for the lag you get a higher probability of being right (at the expense of a higher risk and less reward (because you are part of the way to your target)).

 

OK. Monologue over. Hopefully that makes sense.

[wrines 10]

It does, and I couldnt agree more.

W

[namstrader 10]

always an ally and sponge to your wisdom.

[ant 10]

Hi All,

 

Very good posts by many here. I don't really disagree with what has been said about indicators here, but I'd like to add my thoughts to the thread. I don't get caught up on what's an indicator and what's not indicator. For me, what's important is whether there is lag and whether the "indicator" is based on market-generated information, such as the Market Profile, Price, Volume, Ticks, Trin, Breadth, etc. In general, I don't refer to Market Profile and market internals as an indicator, but it is all technical analysis. For me, an indicator is derived from market-generated information, such as price and volume, and has lag.

 

These days I don't use indicators much because I prefer to trade using Market Profile and market internals. But like I've said before, indicators can be useful in helping a trader interpret the price action in a chart. Sometimes it is easier to see a pattern, momentum, price impulse, OB/OS condition from an indicator than from price itself. There's nothing wrong with that. But make no mistakes about it, everything an indicator shows is right there in the price chart.

 

The problem with the use of indicators is in the way that most traders use indicators and what they expect to get out of them. From what I've seen, many traders tend to use too many indictors, jump from indicator to indicator, and/or experiment with different indicator parameters looking for the holy grail. They try to use indicators for buy/sell signals without really knowing how to interpret what the market is doing - not everyone, but most I think. This is where I think the criticism of indicators is valid. Perhaps misplaced though... One thing I believe wholeheartedly is that new traders should learn to read price action before relying on technical indicators. I will also go as far to say that trading based on indicators alone, without market understanding, is not a long-term strategy for being a consistently successful trader.

 

Kiwi, you contributed a very good post and I agree with most of it. I also agree that there is no lag when using a level as support/resistance. However, my issue with using a moving average as support/resistance is the reliability of the MA itself. Why should an arbitrary MA provide support/resistance for price? Because most traders use it? For me, that's not a good enough reason to risk my money. From my experience, support/resistance derived from Market Profile, with market understanding, is far superior to a moving average or any indicator that I have come across. Personally, I know that I could never trade large size using a strategy that is based on the "squiggles and wiggles" of what I consider to be indicator. I just cannot put that much significance on an indicator, but that's just me. However, with Market Profile, it's different. Market Profile suits me very well.

 

No doubt that I am pretty fond of Market Profile, and I would even say, that it is probably the best and most original contribution to technical analysis over the past few decades if not longer. But Market Profile has its lag too, and as a trader, I need to know the TA tools I use inside out and when they don't work as well. Market Profile is great for determining value when a market is in balance, but Market Profile is not as useful in finding value when a market is trending. When a market is trending, you cannot determine value because the market is in search of value, otherwise it would be facilitating trade within a trading range. I say MP lags in a trend because price is either chasing value, or vice versa.

 

For the record though, I will say that my favorite indicators are the Keltner Channel with a 20EMA, a modified MACD(3, 10, 16), and the ADX(14). And occassionally, I'll use them for confirmation, especially on a tick chart, but NEVER to give me a buy/sell signal.

 

Bottom line for me is would I quit my job as an Engineer to trade using a strategy that is heavily reliant on indicators? No, I would not. I do not see long-term trading success in that scenario. But I would, and will, to trade market development and market structure using Market Profile. I've bought into this whole Market Profile thing, hook, line, and sinker.

 

P.S. I've been trading part-time for about 2 years and this is my opinion thus far. I started with trend-following mechanical systems, moved on to discretionary trading using the indicators listed above (after learning to read price action) and multiple timeframes, and now I am using Market Profile, which has made all the difference in the world in my trading and has given me a huge trading edge. Like most of you, I daytrade primarily (whenever I get the chance).

[namstrader 10]

muy bien amigo. I am trying to get it recently.

[feb2865 10]

Guys

 

This is probably the most talk-about subject in the whole entire trading universe. Indicators followers VS price action followers

 

to be or not to be??

 

So , market profile is better tha EMA'S?

 

or perhaps pivot points are better tha big mac with Bollinger bands on top?

 

Here's a little story

 

Mr. Mark Rubens. 81 years old, Active trader for more than 50 years. My mentor. Yes he trades electronically like us. If you ever go to his house and check his stuff, you won't find any charts whatsover...anywhere

 

I told him once "Markie, why don't you throw some charts to make your life easiser" I said

 

He responded "Raul, to me market is price, not figures"...I shot my mouth, put my tail between my legs and I have never, ever mention the subject again.

 

Do you think he's wrong??? well after 50 years doing the same, I sincerely doubt it

 

will I ever trade with no charts??no I can't They make my life easy...That's Markie's fingerprints, not mine.

 

Listen, every single trader, investor, etc. use some sort of "indicator"

 

Whatever it is...you gotta have something that pop out a signal, don't matter if is leading, laggin' piggin' shoffin' ...I bet you have to have somethin'

 

 

Bottom line: If your EMA is crossing with your SUMA and your CUMA is slopin' down to your OMA for your entry and at the end you are profitable...hey my hats off to you!!!! what's wrong with that?

 

But if price is violating your S/R line and it has to be done with half of your left eye closed and only while your jumpin' with your left foot at exactly 10:067 AM for your entry ....and you're profitable...my hats off to you.

 

It's all about profit my friend otherwise, Walmart is always hiring .

 

People , you MUST have your own edge if you're going to be succesful in this business. That takes time, patience and be persistent to be developed. After that' you will be astute enough for not to let the market(AKA Pit traders) fool you, like it(they) does all the time. If you don't believe me, well keep plugging your umbillical chord to every "strategy" you see outhere and after you're exahusted thousands of dollars , then come back and read my post again.

 

My system, strategy method etc, will make money for me, but will not necessary make money for you. This is like fingerprints my friend and that's exactly why traders should stop looking for the holy grail because it doesn't exist. Once your develop your own "edge" stop looking for more. You don't need any more "technique" you need to start trading.

 

Indicators are just guidelines... what are you going to do when you get the signal?? to me, that's the heart of trading

 

I rely on support and resistance for my trades. Plain and simple. That's all I use since 1983..yes plain vanilla. Should I tell Kiwi that he's wrong becuase he's using MA crossovers? I am not entitled to, besides I am sure he's profitable

 

Should I put an entry because a S/R lines has been crossed..hell no

 

It's not the market crossing the line . Its how the market is going to behave once I get the signal what matters. This is my fingerprint. My system. This morning 11/03/2006 ER2 went straigth to the top @ the speed of sound at the opening. Did I trade? no..why? becuase it went to fast and the market MUST give me signal if it crosses the line otherwise I'll stay on the sidelines.

 

 

You have no idea how many people got screwed up on that rally thinking that the market will continue trailing up. Iv'e seen that many times. But because I have a system in place and I excise discipline into follow my system to the core, my stack is on my side and not in somebody else's pocket.

 

My friends, this type of discussions ends up in nothing 99% of the time. Do yourself a favor and keep perfecting what you're already have. Be open to new things. But if they don't work for you, keep moving on with what you already have.

 

Raul

[MrPaul 10]

...Once your develop your own "edge" stop looking for more. You don't need any more "technique" you need to start trading...

 

So true...

[Soultrader 12]

Amazing posts guys. Indicators vs discretionary trading.... hard topic indeed.

 

As I gain trading experience each day, I have personally found that the simpler the method the easier the trading. Im not sure if I mentioned this before but would like to post it again.

 

A few years ago I was on the phone with my mentor discussing market outlook. In the middle of our conversation her 8 year old daughter interupts and says, "Mommy, why are you so good at reading other traders." This comment coming out of a 8 year old blew my mind. How true can she be!

 

We are trading other traders. I can not move the markets... the group of big players move the markets. My job is to figure out what they are looking at and follow their footsteps. I try to ride the intraday waves that they move. I often ask myself, "What are they looking at? What are they trying to do?" Why? Because they are usually right.

 

A trading signal off a EMA is somebody elses bread and butter. If they make money of it good for them. I cant make money of it because its not part of my sytem and methodology. Support and Resitance points, MP, and, pivots are what I am after. Linda Raschke mentioned how she knew a trader who made a decent living trading off one setup. Thats all we really need... one decent setup that gives us an edge.

 

Big players like to watch for key price levels. Thats when they will step in to buy or sell the market. Which is why I focus on price levels. I always try to place myself in the mind of a big floor trader and what he wants to do.

 

The difference in opinion and how traders process the same information differently is what makes the markets so fascinating. I learn something new everyday as I trade.... trading can be boring but my mind is always stimulated which makes this profession so much fun.