Thursday, 27 November 2014

The problem with indicators

I like to keep my charts clean and free of clutter and indicator bias. The only indicators I use in my trading are moving averages, which I use with candlestick or bar charts. I also don't use candlestick patterns as such; just read the bars to show how the market is behaving.

The reason I don't use indicators for my trading is highlighted in the charts below.

The chart above simply shows how indicators get traders into trouble. On a monthly basis the ES has been in oversold territory on the RSI for close to two years so the tendency to look downwards has caught many traders out by always trying to pick a top. 

For me, the bars tell a story and remove the need for volume indicators. Look closely at the longer green bars and you can see that there is usually always follow-through.

In the simplified monthly chart below, you can trade without this bias. The ES had a target of the previous highs at 1450. Once the market approached this level it is time to step back a little and let the market dictate the next direction. The rectangle area shows clearly that the market has broken out to new highs and failed to correct significantly, showing that the market is stable at these prices and further gains are likely.

The strong bullish bars through 1700 and 1800 in particular gave buying opportunities.

The infamous March 2009 low is marked also and you can clearly see that once significant buying occurred on consecutive months, the market had made its low. 

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