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Saturday, September 7, 2013

Do Technical Indicators Still Work?


“Trading rarely takes as much time as you think it will when you get started. Once you've nailed the concepts, the actual time it takes to trade is actually measured in minutes, rather than hours.” - Louise Bedford

This topic is now a bone of contention among traders. Some say that indicators only confirm what the price is doing and nothing more. Some say that lagging indicators (indicators that give signals after the market bias has been confirmed) can make one miss out on many trading opportunities. Some say that leading indicators (indicators that signal next price movements before they actually happen) can lead to bogus signals. Just as we have experiences that can help our trading career, we can also have experiences that can cause us to temporarily doubt the validity of this career.

Some negative thoughts trouble the trader’s mind regarding their ability to reach the level of permanent competence. The thoughts seek to convince the trader that she/he cannot be a good trader. The thoughts often come when we are facing losses, crises and vulnerability in our trading career; or when we are staggering under the weight of failures and disappointments in trading.

The truth is that, whether you use indicators or not, no trading methodology is perfect. Do you trade purely on price action? Do you use a highly sophisticated robot in trading? Do you use chart patterns? Or do you use some exotic method brought to you by an alien from another planet? I can tell you that the method is not perfect, as the indicators you berate are not perfect either. This reminds us that uncertainty and losses happen to market wizards as well. For inevitable drawdowns, some think that what once was normal may not be normal again. If you want to use any trading methodology whatsoever, you should remember that we tend to be flawless in our trading results (for we are an instant gratification culture). This kind of mindset does not pay in trading, for it would be like dwelling in a fool’s paradise, and that would not improve our real trading experiences.

Technical indicators still work and they will continue to work, though their uses ought to be coupled with stringent position sizing and conservative risk control, just like any other trading methodologies championed by haters of technical indicators. All such experiences illustrate that making changes that can safeguard our portfolios is possible; and doing so always brings benefits. Market speculators cannot talk about the future with utmost certainty, and would simply buy or sell whenever their strategies signify so. Those who follow the line of the least resistance would open long orders in an uptrend with the hope that the price could go more northwards, or they may open short orders with the hope that the price might go more southwards.

The article is ended by the quote below:

“Interestingly, beginning traders, as well as many experienced traders we have met, exhibit a strong tendency to believe that all of their short-term objectives must immediately be met. But in the long-run, it is actually better to hold a long-term perspective.” – Joe Ross (Source: Trade2win.com)

Azeez Mustapha

Market Analyst, Trading Signals Provider and Coach

Eye-opening trading lessons: http://www.harriman-house.com/experttraders


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