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How to properly use indicators

  • #1
  • First Post: Nov 1, 2017 5:36am Nov 1, 2017 5:36am
A while ago I've studied many different indicators in order to understand what they calculate. This study revelaed that it is quite obvious why not every return from the so-called "overbought" or "oversold" indicator region is followed by a new trend. For instance, the stochastics oscillator with a given period %k just shows where the current prize is in relation to the lowest and highest prizes within the last %k candles. Thus, a revisit below 80 or above 20 just shows that prize retraces from an up/down move. However, it's just a retracement and you don't know if prize will extend that retracement to a new trend or will continue the previous trend.

From my research I've indeed seen that info on how to sufficiently use indicators is quite rare. Only a handful traders gave some deeper understanding and hints on it. One of these members is the high impact FF member CrucialPoint. In his earlier posts he wrote a lot about how to correctly use indicators. Here are some examples:

Quote
This is an objective fact that ANY indicator, system, strategy...
WILL ALWAYS have a convergence/divergence nature/behavior in its every signal creation/formation. And if you can't identify these differences between any signals... then one will go round and round and round and round in circles.
[1]

Quote
My indicators are not signals, they are "a language that defines the structure of the market."
[2]

Quote
This is how amateur traders use indicators: enter/exit buy or sell. Professional traders use indicators as a decision making tool after assessing the market condition and then deciding when or where to enter/exit buy or sell.
[3]

Here I don't want to discuss how CrucialPoint's indicators work and how he exactly trades. I'm more interested in the foundation of indicator trading and just used his posts as mind-provoking statements. What are your opinions on the above points?

I think it's obvious to only use indicator readings in trending markets. But is that alone the market structure CP refers to?

Will post some of my interpretations soon.
  • #2
  • Nov 1, 2017 5:50am Nov 1, 2017 5:50am
Ok, let's start ... Look at the attached image CP posted here. It doesn't matter which indicators he used - what matters is that the indicator readings react to prize changes and thus are related to it.

When I first saw this image I had the impression that there are only 2 indicator lines (the blueish and the dashed grey line). The other lines seem to be some kinds of averages. But why the heck would you use averages on indicator lines (it's the same with the standard stochastic oscillator - there's a built-in moving average, too)?!

I think you can use these thicker light blue and orange average lines in order to see if prize moved significantly in comparison to the past prize moves. If the indicator line is far above its corresponding MA implies a strong prize movement (and thus a high momentum) during the last x prizes (where x is the period of the MA). Thus, it seems to be wise to only take signals in regards to their respective MAs.
Attached Image (click to enlarge)
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  • #3
  • Nov 1, 2017 6:17am Nov 1, 2017 6:17am
Great idea to talk about this topic Anti.

Yes a majority of us dont know how to properly use indicators because they could have a lot of different readings. We dont know how to use them and what can we get from them. As you mentioned CP i would like to add his post about MA https://www.forexfactory.com/showthread.php?t=261771&reply=1&page=3"e=4110931#reply

The MA is basic indicator and we could use it in different ways and how about others more complex indicators (MACD, RSI, donchians.... maybe even envelopes as upgrade MAs)

Very interesting topic and i am looking forward for other opinions.
  • #4
  • Nov 1, 2017 6:33am Nov 1, 2017 6:33am
Quoting ataata
Great idea to talk about this topic Anti. Yes a majority of us dont know how to properly use indicators because they could have a lot of different readings. We dont know how to use them and what can we get from them. As you mentioned CP i would like to add his post about MA https://www.forexfactory.com/showthread.php?t=261771&reply=1&page=3"e=4110931#reply The MA is basic indicator and we could use it in different ways and how about others more complex...
Great idea to discuss these things, too. Share whatever you want. I'll post some more ideas/interpretations after inishing myday job.
  • #5
  • Nov 1, 2017 6:40am Nov 1, 2017 6:40am
Ok, let me throw in some general comments.

  1. Remember that they are called indicators - not exacts.
  2. If you use multiple time frames, it makes sense to have fast moving indicators on longer time frames and slower moving indicators on short time frames.
  3. But most importantly, ask yourself this question. "Why would your broker provide you with indicators that make you a profit?"
  4. What is his business model? What is yours?
  5. No indicator can tell you how many traders are sitting on the sidelines watching your currency pair. No indicator can tell you when they are going to enter the market and it what direction.
  6. Will the same indicator work in a ranging market to a trending market?
  7. What decision process do large traders use? Are they compatible with your use of indicators?

It seems that CrucialPoint understands at least some of this.
Cheers, H

  • #6
  • Nov 1, 2017 6:57am Nov 1, 2017 6:57am
Quoting Aich
Ok, let me throw in some general comments. Remember that they are called indicators - not exacts. If you use multiple time frames, it makes sense to have fast moving indicators on longer time frames and slower moving indicators on short time frames. But most importantly, ask yourself this question. "Why would your broker provide you with indicators that make you a profit?" What is his business model? What is yours? No indicator can tell you how many traders are sitting on the sidelines watching your currency pair. No indicator can tell you when...
Hi Aich,

I agree with all of your points. I know that no indicator will be right 100 % since the market can change whenever it wants to and it doesn't care what the indicators tell. However, I believe that it is possible to filter many wrong signals if we fully understand the structure of the market.

CP seems to be able to read the structure of the market with indicators.

The question is how?! What qualifies one signal more than another. I think this is where the second indicator with a different lookback-period comes into play.
  • #7
  • Nov 1, 2017 7:26am Nov 1, 2017 7:26am
Quoting AntiCre
{quote} ....... The question is how?! What qualifies one signal more than another. I think this is where the second indicator with a different lookback-period comes into play.
Excellent thought. However, keep looking to the fundamental reason for the existence of this market - rather then which indicator may work better than another - and you will go a long way towards being consistently profitable.
Discretionary use of indicators is only 1 part of the puzzle.
Work out who moves the market, then work out when they are likely to be in the market, then work out what direction they may take ..... etc.
Call it order flow trading if you need to place a name on everything.
You will never get definitive answers to these questions but you need to keep asking them.
Create a strategy. This involves when to be in the market, when to stay out of the market, as well as other factors that you will work out.
In the end, you need to trust your intuition - but only after you have worked out all this stuff.
Hope this helps. It is all pretty general. It is up to you to fill in the details.
Try using "trading principles" rather than "trading rules". Rules imply that if A happens you must do B. Principles say that if A happens, B generally follows. Every day in the market is a new day.

BTW indicators rely of continuation to be effective. If the market chooses to change direction, abandon the trade in a hurry.
  • #8
  • Nov 1, 2017 7:37am Nov 1, 2017 7:37am
MA is the most effective indicator to tell about the market structure 2nd to none.

If you take signals from ob/os or divergence or long/short above/below MA or MA crossover or BBand breakout which is found on forums, that's 50/50 regurgitated stuff not going to work.

CP made a detail list on post #8 of what simple MA can do, read it then figure how all that's done. Don't assume what can or cannot be done, be creative and open minded. Nobody is going to tell that on forums.
  • #9
  • Edited 8:33am Nov 1, 2017 7:50am | Edited 8:33am
Quoting skyway
MA is the most effective indicator to tell about the market structure 2nd to none. If you take signals from ob/os or divergence or long/short above/below MA or MA crossover or BBand breakout which is found on forums, that's 50/50 stuff not going to work. CP made a detail list on post #8 of what simple MA can do, read it then figure how all that's done. Don't assume what can or cannot be done, be creative and open minded. Nobody is going to tell that on forums.
Yes, I know that list. But even there some questions keep unexplained. For instance, here he showed how to use multiple MAs in order to read the prize action from higher TFs. But what does it mean if prize is in above 2 and below 2 MAs, what if prize is above 1 and below 5 MAs, etc.? The same question applies for looking at higher TF candle colors. What does it mean if D1 is green, H4 is green, H1 is red but M30, M15, M5 and M1 are green?

Surely, we could say that the safest place for a trade is if prize is above all MAs (for long) or below all MAs (for short). But the problem that I have here is that trend only live for a particular time and often the trend is often exhausted when it finally moves above/below all MAs.

And why should an average be superior compared to other ways of printing prize (e.g. using a stochastic indicator). Look at the attached image that shows 2 stochastics with different periods. The 50 line is related to the MA although no averaging is used in the stochastic formula. Additionally, in the lower stochastic window you can see that the indicator readings stayed for a longer time above 70. That clearly indicates a strong up momentum ...
Attached Image
  • #10
  • Nov 1, 2017 8:07am Nov 1, 2017 8:07am
Now I've changed the period of the blue stochastics indicator. The blue indicator represents now a particular short-term momentum while the green indicator represens a particular long-term momentum ...

My idea was that it should be always a good idea to compare the short-term to the long-term momentum. As long as the long-term momentum is strong, fast weaknesses of the short-term momentum may be a good place to enter the market. I think the example is obvious and explains why it is a good idea to trade retracements in the red box (where blue short-term momentum weakened) while trading these weaknesses in the green box is not wise ...
Attached Image
  • #11
  • Nov 1, 2017 8:27am Nov 1, 2017 8:27am
The thing with stochastics in the way you use them (Williams R% does the same job), is they are basically rolling time frames instead of classical timeframes.
A d1 candlestick is a fixed daily tf.
But a 24 R% on H1 is a rolling daily tf.
The truth is hidden from you
  • #12
  • Nov 1, 2017 8:31am Nov 1, 2017 8:31am
Each chart here is an 80 bar rolling timeframe. You can visually see the opening price of it, the high&low, and where the current price fits in between them.
Visually draw 80% 50% 20% levels and you also get your overbought/oversold
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The truth is hidden from you
  • #13
  • Nov 1, 2017 8:35am Nov 1, 2017 8:35am
Quoting MaxenshteinD
Each chart here is an 80 bar rolling timeframe. You can visually see the opening price of it, the high&low, and where the current price fits in between them. Visually draw 80% 50% 20% levels and you also get your overbought/oversold {image} {image}
And now relate this with a stochastic with %k = 80. It's exactly that simple. Alternatively you also could use Donchian Channels, the CycleIdentifier or the ZigZag indicator. They are all based on this principle.

However, I don't believe in overbought/oversold. That's the reason why I put both words in "" in my first post ... It just shows where prize is in relation to the last x prizes ... if stochastic is 100 then the current prize is the highest over the last x prizes, if it is 0 then it's the lowest, etc.
  • #14
  • Nov 1, 2017 8:38am Nov 1, 2017 8:38am
Here you are updating your historical highs. You have no history further than 80 bars ago.
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The truth is hidden from you
  • #15
  • Nov 1, 2017 8:49am Nov 1, 2017 8:49am
The latest R% reading shows where we are in relation to our boundaries.
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The truth is hidden from you
  • #16
  • Nov 1, 2017 8:51am Nov 1, 2017 8:51am
Quoting AntiCre
{quote} And now relate this with a stochastic with %k = 80. It's exactly that simple. Alternatively you also could use Donchian Channels, the CycleIdentifier or the ZigZag indicator. They are all based on this principle. However, I don't believe in overbought/oversold. That's the reason why I put both words in "" in my first post ... It just shows where prize is in relation to the last x prizes ... if stochastic is 100 then the current prize is the highest over the last x prizes, if it is 0 then it's the lowest, etc.
I hated the ob/os due to personal experience with it...
All traders are taught to trade reversals from ob/os.
But what if you look at it as a state where the price is attracted with a magnetic force to the high/low extremum?
The truth is hidden from you
  • #17
  • Nov 1, 2017 8:52am Nov 1, 2017 8:52am
This is why something based on a moving average is probably more practical than something that uses total range over N bars. Because as the window of reference shifts you can have a significantly different reference range from the window shifting along a single bar, which can have an effect on the current output. Not really because of what is happening now but what happened in the past. This decreases the value of such indicators in my mind. Though something that doesn't slide along and keeps a static reference point does not have this problem. Then you realize this can just be reduced to a line. Hmmm.
  • #18
  • Nov 1, 2017 8:57am Nov 1, 2017 8:57am
What if its about convergence/divergence of the current price from "historical" high/low extremums?
The truth is hidden from you
  • #19
  • Nov 1, 2017 8:57am Nov 1, 2017 8:57am
Quoting VincentGallo
This is why something based on a moving average is probably more practical than something that uses total range over N bars. Because as the window of reference shifts you can have a significantly different reference range from the window shifting along a single bar, which can have an effect on the current output. Not really because of what is happening now but what happened in the past. This decreases the value of such indicators in my mind. Though something that doesn't slide along and keeps a static reference point does not have this problem....
But where will you put the line and for how long?
The truth is hidden from you
  • #20
  • Nov 1, 2017 8:58am Nov 1, 2017 8:58am
Quoting MaxenshteinD
The latest R% reading shows where we are in relation to our boundaries. {image} {image}
Exactly. We can either interpret it as boundaries or we look at it in terms of momentum. You can see that recently prize didn't leave its upper prize range. Thus, prize went up due to your 151-momentum(*).

Now use another momentum, compare it with the picture above and tell me where you could have entered and why. I think there are two possibilities:

  1. Enter after a new trend started when both (or more) momenta lines break out of a predefined level.
  2. Re-enter if long-term momentum is still high but low-term momentum became weaker and now strenghtens again (for trend continuation).

(This is only my personal interpretation and doesn't have to be neccessarily true. Indeed, it definitively won't work sometimes.)

---

* This is not real momentum since it is standardized by the total prize range. But you can create some kind of momentum easily by adapting the formula for Williams %R or Stochastic.

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