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Technical Indicators Explained

Technical Indicators ExplainedHello again, traders. Today’s topic is indicators.

The vast majority of traders – 90 percent or more, possibly 99 percent of all traders – rely on indicators of some sort.  This is understandable in the beginning, especially unless and until a trader understands how the market works for real and how it generates the information that it does.

Indicators, sadly, do not indicate anything of a specifically useful nature.

They are merely a visual display of a compilation of data points or parameters that a given indicator measures from historical market activity.  Some measure a series of closing prices, some measure the magnitude of certain moves over a series of bars or candles while others assess volume or price disparities, etc.  However, no matter how much data any indicator (or compilation of indicators) can measure or how recent the data or how “fast” the indicator is set to, it is still all just a representation past tense behavior.  They do not “forecast” a thing. 

No matter what “has” happened, no indicator can foretell (accurately, specifically or certainly on anything even remotely resembling a consistent basis) of impending doom, gloom, or boom.

They merely measure data or events that have occurred within the matrix that any such indicator is “set” to record and then that information is broadcast on a chart typically in a one, two or three-line  display in various fashions.  Some try to portray a trend, while others try to denote overly ambitious or extreme behavior while others attempt (weakly) to display an “over bought” or “oversold” situation within a certain market (this is laughable as those conditions can and often do persist for extended periods of time).  There is no earthly way a trader of any caliber can trade well, or read or forecast the market using indicators.

Trading well is not about being “right,” as most traders believe.  It is about being accurate.

There are so many moving parts behind the scenes, that no trader and no trading company, no matter how large or powerful they may be, can keep tabs on, examine and monitor all of the moving parts that make up an economy, a market, or the price action of buyers & sellers.  Get 5 or 10 people in a room at a party, for example, and you will have 5 or 10 (or more) different responses to any topic brought up, albeit a movie, a restaurant, or a political opinion.  So imagine, trying to get a market made up of possibly hundreds of thousands of traders to agree….simultaneously and all be pointing in the same direction, especially at a particular price point.  That would be nearly impossible to do at any given time, and certainly impossible to do consistently using an indicator of any type, which merely measures a matrix of parameters of past performance. That would be like saying the same 200,000 people who ate sushi last Wednesday night will have sushi at the same restaurant, at the same time, and order the same thing this Wednesday night…..because my “measurement” (read: indicator) said that is what happened last time.  That hardly has any bearing whatsoever on what will happen next time.

Sadly, most traders do not have a thorough understanding of how the market works (for real) or how it generates the information that it does.

So they rely on such indicators to help them try to “read” the market.  Or so they think.  The problem with that scenario, regardless of indicator type, is that the market changes all the time.  Not just directionally, but ALL of the parameters that make up a market, and its moves, change all the time.  As we said, not just direction, but also magnitude, range, timing, targets, volume, volatility, etc.  No indicator on earth can keep track of all of these parameters, because they all change, but they also all change at different rates, making it impossible for any indicator, system or algorithm to keep up with those changes or (more importantly) the ever-change rate of change of each and every aspect or parameter.  Traders with some past knowledge and use of indicators try to “tweak” their indicators to react faster so that they get their indication sooner.  Well, that only works if the market is currently “speeding up” in its transitional phases of that ever-changing data stream of changing parameters.  However, once it slows down again, and we are not talking weeks or months, but hours and possibly minutes, that newly-tweaked indicator will once again be out of sync and would then be “too fast” for slower market conditions.  Therefore, the use of indicators is a never-ending quest to try to “get in sync” with the market…but always being behind, like a dog chasing its own tail.

We at Leading Edge Trading do not use any indicators whatsoever, and yet we post, in advance, specifically, as in “to the tick,” where the market will go, the levels it will use, and the order of events and map that out at 8:00 AM Eastern time each morning and update it throughout the day, so that we capture each and every move or leg, describing in advance where the market will go, segment by segment, “from” where and “to” where (specifically…as in more or less to the tick).

As we stated previously, that is impossible, absolutely impossible to do with any indicator…mapping out both ends of each move in advance, especially 10 or 15 times a day, day after day, week after week.

How can we do this?  Because (as we have said) we understand how the market works, and how it generates the information that it does, without the use of indicators.  Keep in mind that an indicator is no more than a matrix of parameters that someone decided may be worthy of looking at, for example, a series of closing prices on a certain time frame chart, or the rate of expansion or contraction of a certain bar or number of bars, or some other hocus pocus formula that someone, unbeknownst to the trader in most cases, concocted because that was their best guess as to how to measure the market.

Sadly, this is what passes for common knowledge and most traders fall into that trap of using indicators to try to read the market.

Indicators are a poor substitute for true market knowledge, and they will never take a trader where he wants to be.  They are a crutch…and a poor crutch at that.

If you have ever seen the movie “Tin Cup” with Kevin Costner as a struggling golfer on the PGA tour, when his swing goes off, there is a scene where he tries all of these gadgets in private to try to get his game back.  He gets embarrassed when the actress in the movie surprises him by entering the room and seeing him with these gadgets on and he quickly tries to strip himself of these foolish devices.  Have you ever seen a player on the PGA Tour using these gadgets?  Of course not.  And why?  Because they are a poor substitute for actually understanding the mechanics of the golf swing and Professional golfers understand the mechanics of the swing and can assess and correct any inconsistencies that may develop and adjust for the given conditions.  That is the same cause and effect with traders using indicators to try to trade vs. a pro trader who understands how the market truly works and generates the useable information, in advance, necessary to be able to capture anything and everything that occurs, having had it all mapped out (specifically) ahead of time.

We urge you to let us prove to you that this can be the case, where you can trade free of indicators and have each and every move, as well as the entire day itself, mapped out specifically (as in to the tick) in advance, all day, every day.  That is what we do here at Leading Edge Trading and we look forward to the opportunity to prove that to you.

Posted by admin on December 15, 2014 in Trading Basics and tagged .

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