I felt this post by AusDoc deserved its own thread. (hope you dont mind Aus?)
Well worth sifting for gold, enjoy.
Well worth sifting for gold, enjoy.
AusDoc said:Generally when I provide an indicator I make it clear that my view is that you must first be able to trade with a blank (no indicator), or naked, chart. If I post one without explicitly stating that then the context should make it clear that the tool is to do one very specific job that should be seen as fitting into an overall approach to the market in question, that I assume people already have.
First, look at a naked chart of any time frame that suits your needs. When it comes to developing a trading plan you will need to have a clear understanding of whether or not, and if so, how to use time and which periods you will work with and why, but that's another topic.
When you look at the chart you must be able to identify whether or not there is a trend, and if so, in which direction price is trending. This is so elementary that if you cannot do this with absolute confidence then it is game over. This is where you will note overall market structure.
Still looking at that chart, you need to identify the character, mood and sentiment of the market. Is it showing conviction? Are there obvious roadblocks or apparent targets that PA seems to be heading for? Is it looking strong or weak? And so on.
Then focus on most recent and current or immediate price action. Always be answering the question: who is in control right now? Don't die wondering. Know.
None of this has used any indicators but will actually provide more than enough information for a trader to determine if there is a trading opportunity now or soon or not. Techniques for entry, protective stop placement and possible targets are also another topic but all of this should be in the written trading plan and can be determined from the chart analysis. Add sound money management and active position management and start growing accounts.
Far too many people never get through the above. They lurch forward with a thousand different things (indicators, books, seminars, workshops, webinars, gurus, forums and other traders who have no more clues than they do, and on and on). They end up with very messed up 'psychology' and a head and emotional state that cement in errors, make life miserable and generally result in frustration or an inability to pull the trigger. Frankly, the retail industry seems to be designed to produce just this sort of outcome unfortunately.
This is not to say that there are no good teachers or useful books etc. All I am saying is that without a sound foundation in the absolute basics then what people keep trying to build will keep falling over or at best be the source of repeated frustration and disappointment.
Once the above foundation is in place, very well informed, sensible tools can be added to the picture. Every one must be necessary to add something truly useful and if anything doesn't do that it has no place on a chart. A legitimate tool may offer brilliant insight into market flow dynamics, such as a fib tool for example, or summarise price to add clarity to certain aspects of market behaviour, such as a moving average, for example.
The types of tools that I happen to think are worthwhile are:
Horizontal lines. These help to see where a market has proven reactive in the past and can sometimes help to identify probable levels of interest to a trader. You can identify and apply them manually (an essential skill) or use one of the widely followed methods such as pivots, Murrey Math octaves, round numbers, previous highs and lows, etc. This will cover both support and resistance and supply and demand.
Trend aids. These provide a visual summary of price action at a chosen degree of sensitivity (or responsiveness) and stability (reliability). While many people use trend lines and regression channels, etc, I personally am not a fan of those for various reasons. My preference is moving averages. There are dozens of methods or types of moving averages and when fully understood and intelligently used they can be a smart trader's best friend. When you hear people say moving averages lag you know that they don't know much. In fact moving averages do not lag unless you make them do so. A plain simple or exponential MA, the most commonly used types, cannot possibly lag. When people blame their MAs and say they lag it means their use was not well understood and their interpretation lagged. A moving average tells you precisely what it is designed to tell you. It does not lie; it does not lag.
Market dynamics tools or techniques. My favourite is the Fibonacci retracement/extension tool. I am not interested in exactly why so-called fib levels 'work' so well (well, I am actually, but it really doesn't matter why, just that they do) but they are incredibly useful. It is well worth learning how to use this effectively. Others may use Gann or Elliott Wave theories but having developed considerable expertise in these areas I recognised their flaws and realised that they were completely unnecessary and mostly more hindrance than help.
I can trade without the above tools or aids but just wouldn't want to be without them. Things below in this list are what made the cut for me so I use them. Everyone needs to work out their own list very carefully and critically.
MACD. It is important to remember that the full name is Moving Average Convergence Divergence and the name literally describes what the indicator displays. It is just a way of displaying a two moving average crossover in a sub-window rather than on a the price display. I loved the original but thought I could improve on it so I invented my own many years ago, the MAT. Others did the same, so we have variations on the theme in things like the OSma and AO.
I prefer to display the indicator as a histogram, extract all the details from it that I can and also have alarms built in. I know it intimately and use it effectively. More recently I have been evaluating the ZeroLag version of the MACD and now have it on at least one trading chart all the time. I posted my version of the ZeroLag MACD elsewhere in this forum.
These tools don't tell you anything you can't see in price action but they make your job much easier by summarising the unfolding chart story and displaying it so clearly blind Freddy could see it. The zero line on the MACD actually displays the slow moving average and what people call the MACD line is just the fast MA oscillating about or converging and diverging from that line. Mostly then a so-called signal line is added, but that is not essential. Trend direction, momentum, pull-backs for late, additional or re-entry, trend end approaching and happening can all be flagged by a suitable MACD.
Dynamic trend channel. Great for helping to confirm real 'overbought' and 'oversold' levels. Look at TMA channels if you're interested in these and learn how to set it up and read it properly.
Stochastic oscillator. I have a favourite with some bells and whistles added. It is fast and deadly accurate in confirming turns. Once again, not necessary but incredibly useful at times. Like all tools, I repeat, it must be thoroughly understood so it can be used sensibly and can only ever repeat or confirm what price action is already showing. Always focus on price. Add this sort of thing only if you really want to and only after you're already an expert without it.
Time displays. These are very useful but not really essential. This includes session indicators and more precise identification of key times when price typically moves significantly or puts in a meaningful high or low. I have provided versions of my target zones or kill zones. They represent key market opening or closing times when higher levels of volume are usually transacted and market makers' buy and sell programs are instigated. Good times to be aware of and the tools help older guys like me to stay orientated to time!
News indicator. It always pays to know when significant news is scheduled. It is easy enough to find a web site with all the details but sometimes it is handy to have a neat little reminder right on screen, sitting in a chart so you can't miss something important. I use the one by SonicR.
Volume. When I traded futures volume was critical. Moving to OTC spot fx was a shock -- all these people who think they're using technical analysis but nobody has volume. What's wrong with them, I wondered? OK, so I learned about the folly of fx traders! There is no real TA without volume. It is like having a meal of ham and eggs without the eggs. It's just not the real thing, something critical is missing. Not enough people appreciate this. Anyway, I know the whole volume story and just what is and isn't being shown as Volume in MT4 but sometimes when I'm bored enough I add volume and have discovered that sometimes it can actually be useful. More people would probably do this if they knew what they were missing, but clearly in fx you can do without it. I use the SonicR PVA indicator.
Odds and ends. I have a small collection of info always on one chart per pair that gives bar time, pair name and time frame, large price display, ADR, AWR, spread, etc. This is down to personal choice. It is just the details that I want to be able to access easily.
Training aids. These tools, or their equivalents, are used daily by some traders as important parts of their methods. This is where we get into the clutter I think. These are very useful as tools for learning market structure, acquiring a multiple time frame appreciation of market dynamics, spotting fractals of varying significance and, used at the right time frame, helping to identify high probability stops locations. In this category I have provided the
Multiple Timeframe Fractal Indicator for Studying Market Structure and AusDoc's Support & Resistance Tool for Locating Stops. Useful aids I believe, or certainly hope, but this must be a user judgement.
I have a tool I use to track relative market strength and trend direction and another I developed that gives me a summary of the market condition of the pairs I trade. The latter shows me trend direction and price behaviour relative to my trend indicator across multiple time frames for all pairs of interest. These are nice to have but only relevant to experienced traders. The trouble is people want to skip the basics and try to master fancy tools like these and then wonder what is wrong with the market!
So that's a summary of my views on indicators with some insights into what I use, for what that may be worth. If you really want to be a successful trader though, the right place to start isn't indicators or even price charts! I know no one wants to hear this and everyone and his or her dog thinks they 'know it already' but I'm going to annoy you by saying it anyway. Successful trading is all about 'psychology' (your mental and emotional state). You need to get this in order and when I see negativity, hostility and bickering among my trading friends it saddens me because it is a clear sign of not having it in order at all. Please guys, work on this.