AlgoStrats Blog

  • By Marco Mayer
  • Posted Jan 12, 2017

Indicators - A question of preferences?

One of the most commonly discussed trading topics is whether indicators are good or bad. Should a trader use them or is it just a distraction that doesn’t add anything to the „pure“ price-action you can see on a simple price chart?

The answer is that making a war of opinions out of anything related to trading and thinking in terms of „good“ or „bad“ is kind of silly. Remember, we’re talking about trading here, not about where you can get the best Burgers, which is the best soccer team or some other question of preferences. Trading is about making money, so it’s important to ask the right objective questions and for these there usually are objective answers.

Does the indicator you’re looking at give you an edge in the markets or not? Or if it’s an indicator supposed to provide you a specific information in an easier way, does it do its job and make your life as a trader easier?

If it does it would be crazy to not use it. An indicator is nothing else than some kind of transformation/representation of whatever data you put in there and how you’d like to see it. The same can be said about OHLC charts. If you want it really pure then you should look only at tick data as an OHLC price bar is just a summary of that.

So don’t get fooled by the „Price Action is the only way!“ crowd. Of their patterns, you can ask the very same question: „Does the shown price pattern provide an edge, yes or no?“. If the answer is no, and that is unfortunately the truth for most price patterns and indicators out there, then just forget about it and move on. Again this isn’t about a question of what appeals to you or not. It’s about whether it makes you money or not.

A couple of months ago I stumbled over a video where some trading educator explained that his/her trading career started trading with indicators and then he/she finally became 100% indicator-free and has now been „trading naked“ for a couple of years. As if using indicators is some kind of terrible addiction that’s very hard to break free from and not using any indicators is the hallmark of a successful trader. Now funnily I have to admit that when I started out as a trader I was thinking in the same vein for a couple of years. Crazy!

The truth is that any indicator is only as useful as the trader’s knowledge about the indicator. Obviously just randomly adding a couple of indicators to a chart isn’t going to be helpful. You should understand pretty well what an indicator actually does, how it works and what that number it spits out tells you. Otherwise it’s going to be very hard to know when and how to use it. Most indicators „work“ only under certain conditions. But the very same thing can be said about any price pattern out there. If you blindly trade it without having done any testing on whether it provides you can edge or not in the market/timeframe/conditions you want to trade it, you can as well use any arbitrary indicator out there!

As a systematic trader I use a lot of indicators in one way or the other. Most of them are indicators I came up with on my own to make my life as a trader easier. Others tell me whether a certain price pattern is there or not. But I know exactly how each indicator works and what it’s actually useful for. Whether it’s indicating some OHLC based price pattern or providing some measurement of volatility that might not be that easy to recognize by just looking at a price chart.

Happy Trading!

Marco



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