Why technical indicators are useless in trading

[Soultrader]

Ever since the outbreak of electronic trading, technical indicators such as stochastics, RSI, MACD, ADX, etc... have gained popularity among the trading public. There is obviously good money selling indicators and mechanical trading systems and the so called "hype" will never disappear. Books will continue to write about magical indicators and promoters wil continue to sell new indicators.

However, relying on indicators is the worst way to trade. As the name states, indicators indicate. In my opinion they are completely useless. Many successful traders do not rely on indicators. Floor traders do not rely on indicators. They do not have the luxury to sit in front of a monitor and base their decision because the RSI has crossed above 20. They rely on order flow.

Amatuers love indicators and they will continue to find new indicators that can show them the holy grail in trading. Unfortunately, this is all hype. The number one indicator is PRICE. Price is king. The day I took all my indicators off my charts and traded on price alone was the day I transformed into a profitable trader.

Understanding price behavior takes time and work. But the numerous amount of hours trying to find a reliable indicator and tweaking it is equivalent to learning price action. Trading is simple. There is no need to make it more complicated by plotting a hundred indicators on your charts.

Trading Wizard, Linda Bradford Raschke, said it best. “I've known hundreds of professional traders throughout my career. I don't want to disappoint you, but I know of only two who were able to make a steady living for themselves with a mechanical system.”

Learn to trade price. Indicators will lie to you always. Price will never let you down.

Best of trading

 

[palefrost]

I'm a newbie to trading so i'm sorry if this is a stupid question but on most sites i do see people referring to the technical indicators and you are the first person to discount them. How exactly should a newbie go about charting the price? Do you mean if its low buy? As simple as that? Do you mean, watch who else is buying the stock more? Do you follow the news in regards to stocks? Wow im so glad your writing here! I realize how much i have to learn.

 

[Soultrader]

Hi palefrost I'm glad you found my post useful. I'll tell you a secret. Most new traders will usually discard what I just posted and will continue to look for magical indicators. You are on the right track!

First let me begin with answering your questions. Do not buy just because its low. You need to understand where key levels of support is. You also need to understand price acceptance vs price rejection.

Picture the financial market as ebay. If there is alot of supply for one product, the sellers will not receive high bids. If there is only 1 or 2 of the same item posted, bidders will race to bid up the price. Simple law of supply and demand.

The market is an auction. Price moves in brackets. This bracket can be as narrow as a few points (few cents) or as wide as a 20 - 40 points ($1-3 for example). Once this level is broken, it will travel into a new zone. Picture boxes on top of each other. Once price breaks the ceiling of the first box, it will enter the second box. Once it breaks the ceiling of the second box, it will enter the third box. And so on...

You may find price going up and down inside one single box. This is also called consolidation. When prices go from one box to the next.. this is called a trend.

Now let me explain price rejection vs price acceptance. Let's say price enters box #4. However price is rejected and pushed back into box #3. This is a good sign that prices will not trade above box #3. This is because sellers believed prices to be too high in box #4 and returned it back to value. In this case value is equivalent to box #3. This is where price is accepted and perceived to be fair between both the buyers and sellers. When either the buyer or seller decides to show more confidence, they will then move price into a box where value or market balance is found.

This is the basic concept of the markets. 95% of all traders do not understand this concept. 95% of all traders fail. By understanding market acceptance vs market rejection, there is absolutely no need to use any technical indicators.

Take a look at my thread. I posted a good picture of today's action.

"Do you mean, watch who else is buying the stock more?"

Footprints are always left in the markets by the big boys. This can be seen by simply watching the tape or analyzing volume. Tape reading or time of sales is the hardest skill to learn in trading. It will be beyond the scope of this thread to explain tape reading.... perhaps I will post a trading video on this topic.

One important note though: Floor traders and day traders do not move price. Other time frame buyers and sellers move price. This is who you need to be watching for.Other time frame participants can also be referred to as: hedge funds, institutional orders, Soros, Buffet, etc... Basically the big players of the game. They will either come into the market during the morning session or the afternoon session. You hardly find them stepping in during lunch hours.

Try studying market profile. This will give you a better idea on what I am talking about. If you have any questions feel free to ask me. Hope this helps.

 

[palefrost]

*cheers* thank you. Your writing style is easy to understand! I have a lot to learn on this topic.

This can be seen by simply watching the tape or analyzing volume.

When ever you have the time id be interested in seeing it!

Try studying market profile

I assume you mean each individual stock and the background of it?

Could you recommend an online class or tutorial to get me used to some of the common used terms and basic market trading?

 

[Soultrader]

Heres a short video on volume analysis that I made before. I'll post another in depth video soon.

http://www.traderslaboratory.com/forums/trading-videos/38-volume-price-analysis-lab.html

Accumulation can be detected early just by looking at volume. A stock advances early in its stages because of accumulation.

Market profile is anaylsis strategy developed by the Chicago Board of Trade over a decade ago. It has not been widely accepted by the public due to its complex nature. Its concept is based on Time x Price = Opportunity

Thus the term TPO. A list of terms can be found here:

http://www.traderslaboratory.com/forums/market-profile/43-market-profile-key-terms.html

 

[palefrost]

Heres a short video on volume analysis that I made before. I'll post another in depth video soon.

http://www.traderslaboratory.com/forums/trading-videos/38-volume-price-analysis-lab.html

Accumulation can be detected early just by looking at volume. A stock advances early in its stages because of accumulation.

Market profile is anaylsis strategy developed by the Chicago Board of Trade over a decade ago. It has not been widely accepted by the public due to its complex nature. Its concept is based on Time x Price = Opportunity

Thus the term TPO. A list of terms can be found here:

http://www.traderslaboratory.com/forums/market-profile/43-market-profile-key-terms.html

WOW !! Ill watch this at lunchtime! You must really be into this! Ill have to check out all your links lol.

 

[Soultrader]

WOW !! Ill watch this at lunchtime! You must really be into this! Ill have to check out all your links lol.

It's what I do for a living

 

[palefrost]

It's what I do for a living

Are you married? *winks uncontrollably*

about that video..are you saying to trade i need to be watching all those charts? Is there any other safe way to buy and sell without watching the charts like that?

 

[Soultrader]

Are you married? *winks uncontrollably*

about that video..are you saying to trade i need to be watching all those charts? Is there any other safe way to buy and sell without watching the charts like that?

Im still in the markets

Every trader has their own style. Some may not even use a chart to trade. Some traditional traders like to use point and figure charts. Others use market profile charts.

I spent time crafting this particular method so it would be relatively hard for me to trade without the trading tools that I am used to. My trading methodology may not fit alot of traders preference. However, if you do compare my methodology to other traders you will find that I keep things fairly simple. I know traders who jam pack their charts with indicators that its hard just to see price action.

Perhaps you are more into fundamental trading? Although fundamentals will give you the bigger picture, you will still need to learn how to read charts to pinpoint your entries and exits. Otherwise, you may be right on your analysis but may be leaving money on the table by getting in at poor entries.