Call me stupid - Indicator discovery | Forex Factory

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Call me stupid - Indicator discovery

  • #1
  • First Post: Mar 3, 2007 2:18am Mar 3, 2007 2:18am
I really never knew this. After months of looking at RSI (told it was a "leading" indicator), I found out tonight it was simply a quick EMA. No wonder I never figured out how to intigrate it. For instance, 1 ema = 21 RSI. Then just to calm myself down I checked the stochs, these are also just smooth MAs. Oscillator (sp), again an EMA. For a twist, MACD is a WMA. What is the point of all these indicators if all they are all MAs? Wouldn't it be best just to use MAs? I suppose trend, support, resistance lines are not based off of MAs, I don't know if ADX (seems to not be) is based off of MAs or not.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #2
  • Mar 3, 2007 2:27am Mar 3, 2007 2:27am
RSI and Stochastic are based on MA but their output are presented differently. Stochastic makes it easy for people to estimate momentum. Anyone who can (many cannot) see momentum in normal MA indicators absolutely do not need Stochastic.
  • #3
  • Mar 3, 2007 8:14am Mar 3, 2007 8:14am
My suggestion is not to use any indicators... Studying the price movements' is the key. BUT if you want to, then learn everything about your indicators, otherwise they will cause much more trouble than help.
Cheers!
  • #4
  • Mar 3, 2007 8:46am Mar 3, 2007 8:46am
Nice info on RSI

http://stockcharts.com/school/doku.p...ngth_index_rsi

Google for more:"relative strength index formula"

Stupidity is not asking...
  • #5
  • Mar 3, 2007 10:12am Mar 3, 2007 10:12am
Greetings StockJay...firstly i would not be one to ever call YOU "stupid". I've enjoyed reading and pondering many of your posts! That said, while i still luv to have some squiggly lines on my charts, as stated above by others: Price Action rules.

...OK back on topic; Indicators...

Many moons ago i stumbles upon the Woodies Club. An excellent site BTW. So i was reading up on the CCI being touted as a "leading indicator". One day in my doodles i happen to place on my chart the same moving averages that were set internally on the CCI and noticed that the price action would play off the chart's MAs exactly as the indicator's sqiggly lines would behave. So i watched the CCI for a month or so comparing it to the PA off the chart's MAs and got so used to the so-called Woodies setups and ditched the CCI altogether. I'm not saying that is the right response to the indicator question, just one way, one trader tackled his ponderings on a similar question a time ago.

Good trading StockJay,
Thom
  • #6
  • Mar 3, 2007 10:57am Mar 3, 2007 10:57am
Thanks for the views folks. Although, I still love indicators. I wont leave them, I just made a new discovery about a couple of them and found it quite interesting. Stochastics work for me, so does an MACD... I just never knew that they were MAs I could put right up on the chart.

I know many promote Price Action, I honestly don't even know what that means. If I give you a blank chart will you be able to tell me where the price will go with 70% probability? I suppose I study price action, just how it acts around my indicators. I think strictly Price Action is something that is developed after many months if not years of watching the market, people like me who have been trading six months need some indicators.

Also, if I got rid of my indicators, my wordfile of strict entry and exit parameters wouldn't be any good anymore. Without those I would be back to old time.... I didn't enjoy those. :
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #7
  • Mar 3, 2007 11:11am Mar 3, 2007 11:11am
Quoting MarkGavalda
My suggestion is not to use any indicators... Studying the price movements' is the key. BUT if you want to, then learn everything about your indicators, otherwise they will cause much more trouble than help.
Cheers!
so price action is the most important?
  • #8
  • Mar 3, 2007 11:12am Mar 3, 2007 11:12am
Quoting accrete
Greetings StockJay...firstly i would not be one to ever call YOU "stupid". I've enjoyed reading and pondering many of your posts! That said, while i still luv to have some squiggly lines on my charts, as stated above by others: Price Action rules.

...OK back on topic; Indicators...

Many moons ago i stumbles upon the Woodies Club. An excellent site BTW. So i was reading up on the CCI being touted as a "leading indicator". One day in my doodles i happen to place on my chart the same moving averages that were set internally on the CCI and noticed that the price action would play off the chart's MAs exactly as the indicator's sqiggly lines would behave. So i watched the CCI for a month or so comparing it to the PA off the chart's MAs and got so used to the so-called Woodies setups and ditched the CCI altogether. I'm not saying that is the right response to the indicator question, just one way, one trader tackled his ponderings on a similar question a time ago.

Good trading StockJay,
Thom
This is very true, a 14 cci the zero line is the moving ave and the 14 line is the price.
So a zero line bounce is about the same as price bouncing off the moving ave.

So why do we bung our charts up with a cci when a ma would do the same job ?
Trendlines and divergence there is nothing like a cci for spotting and finding em.
A GB100 has a huge hit rate (that’s when the cci has been at 100 one side and then the other whilst braking a trend line)


Mart
----o00o--°(_)°--o00o----
  • #9
  • Mar 3, 2007 3:56pm Mar 3, 2007 3:56pm
Agreed Mart-Hart. Presentation is everything. on a 50-14 CCI setup, 14 pullbacks to the 100 line while 50 holds at zero line or above, are often good continuation trades.
  • #10
  • Mar 3, 2007 5:24pm Mar 3, 2007 5:24pm
Quoting StockKJay
Thanks for the views folks (...)
Just a quick note. You discovered that MACD isn't a "real" indicator, it's just the difference between to MA's (if I remember correctly?). And what are MA's? They are representers of the price's actions smoothened with some average values. So what do you get? Price action interpreted to some indicator, which is converted to MACD... Why do we have to complicate it that much?

Example #1: Price is going down like mad, MA's following, MACD is spiking a huge to the downside. Price hits a support line, and this time it finds support here too, so stalls a bit, even starts to correct to the upside a bit. (Remember this Friday?) The down-wave took 2-3 hours, but the correction took 5-6 hours. What do you see on MACD? That price will go up and up (bars are getting closer to zero from the negative are, EA's are trying to cross each other again, etc.).
You're going long because you think your indicators are predicting the future, and price will rise, but hell no. After the little correction it starts to fall again stopping you out because when your lagging indicators switch to signal short-trend again, you're already late.

You said you were looking at the MACD for a long time. I guess, if you try it (hard) you'll be able to see your favourite MACD on the chart WITHOUT adding it phisically. How is that possible? By the price's movement and based on your experiences you're able to guess how the MACD would worked in a given situation...

Forex (and every financial market by the way) is a reflection of people's thoughts, sentiments, it can't be accurately forecasted with lagging indicators. They're indicating not forseeing anything. Yes, you can achieve a certain amount of success with indicators, but you will never be able to achieve a performance like you could with correct price action analysis.

What is price action?
I always enjoy imagining the chart as a warzone. The United Army of Bulls are trying to fight the Paramilitary Organization of the Grizzly Bear Warriors in this neverending battle. Imagine it like a real war: with weapons (news, events) with supplies (support & resistance), trenches (fibonacci & pivot lines), etc.
When the bearis organization is attacking you have to act as a general, so go on and open up the map of the warzone for god's sake! Have a quick look, because people are dying out there. Okay, what do we have on the map (chart)? Until now the bulls were progressing but they are tired now and couldn't breach the next critical defend line of the bears (means price is bouncing off a resistance line). What will happen now? Bulls will reorganize and try to attack once or twice more. If the defense line is strong, they won't be able to get through, that critical line remains intact. The bear warriors immediately notice the weakening in the bulls army, they're planning a counter-attack. This is the time when nothing happens in the warzone, but everybody knows sooner or later something's gonna blow. You quickly make use of the time to see what's going to happen. You immediately draw the previously tested critical line to your map, and count on that bear counter-attack. How strong will they get? This puts up the question: how far could they possibly fight-back?
On the map you have to draw now the bull trenches. Daily, weekly Pivot, Fibonacci lines, etc, what you consider important. After you set up everything you contemplate a bit on from where do you consider the counter-attack active? Depending on the timeframe this could mean 20-30pips (let's say yards in this fantasy-world) from the critical, unbreached resistance line. When the battle continues you watch how things evolve and shout a hurray and a 'Go bears, go!' every time when the bears can take another important trench. When they find stout resistance (this is called support in forex if it's a downtrend... funny) (you know this from a Doji candlestick for example) you take a closer look, and move your S/L (stoploss) to the very next trench which you left behind. Then wait until something happens.
The bulls gather some reinforcements and shoot the bears in their hams and everything starts from the beginning...

I hope this little story of mine could help some of you out there who don't know what the heck is 'price action' yet.
Have a great weekend everyone! Mark
  • #11
  • Mar 3, 2007 6:10pm Mar 3, 2007 6:10pm
Speaking as a wargamer of more than 40 years, a nice analogy.
  • #12
  • Mar 3, 2007 8:49pm Mar 3, 2007 8:49pm
Quoting MarkGavalda

I hope this little story of mine could help some of you out there who don't know what the heck is 'price action' yet.
Have a great weekend everyone! Mark
Mark, this was a great post. My indicators will give me bad trades, there is no denying that. Your example of Friday I do believe was a reference to a ***/JPY pair, you are correct, most technical indicators on less than a 1hr time frame would have certainly given a bad trade. Mine did. Though it also gave me the second push down. So long as the avg is + instead of -, = happy me.

You have a good weekend yourself.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #13
  • Mar 3, 2007 9:00pm Mar 3, 2007 9:00pm
I've traded Forex since May. What I've discovered is that the fewer indicators on the chart, the better I do. I've always used indicators to trade stocks, and they seem to work decently there. They just don't move fast enough for Forex. When you get right down to it, all they show you is what price did a few bars ago. If you want to know what it's doing now, you've got pay close attention to the appearance of the current bar, it's relation to the previous bars and where that bar is on the chart. I'm looking at moving averages and rftl and rstl. That's pretty much it, and those are just for reference.
Quoting StockKJay
Thanks for the views folks. Although, I still love indicators. I wont leave them, I just made a new discovery about a couple of them and found it quite interesting. Stochastics work for me, so does an MACD... I just never knew that they were MAs I could put right up on the chart.

I know many promote Price Action, I honestly don't even know what that means. If I give you a blank chart will you be able to tell me where the price will go with 70% probability? I suppose I study price action, just how it acts around my indicators. I think strictly Price Action is something that is developed after many months if not years of watching the market, people like me who have been trading six months need some indicators.

Also, if I got rid of my indicators, my wordfile of strict entry and exit parameters wouldn't be any good anymore. Without those I would be back to old time.... I didn't enjoy those. :
  • #14
  • Mar 3, 2007 9:50pm Mar 3, 2007 9:50pm
Quoting accrete
Many moons ago i stumbles upon the Woodies Club. An excellent site BTW. So i was reading up on the CCI being touted as a "leading indicator". One day in my doodles i happen to place on my chart the same moving averages that were set internally on the CCI and noticed that the price action would play off the chart's MAs exactly as the indicator's sqiggly lines would behave. So i watched the CCI for a month or so comparing it to the PA off the chart's MAs and got so used to the so-called Woodies setups and ditched the CCI altogether. I'm not saying that is the right response to the indicator question, just one way, one trader tackled his ponderings on a similar question a time ago.

Good trading StockJay,
Thom
I teach Woodies CCI in our Forex room in the evenings...
Mr. Trend
  • #15
  • Mar 3, 2007 10:20pm Mar 3, 2007 10:20pm
Quoting Mr Trend
I teach Woodies CCI in our Forex room in the evenings...
Very cool Mr.T. I've thought about joining in at times. I've enjoyed reading through many of the articles and watching several teaching videos there.

: ) Thom
  • #16
  • Mar 4, 2007 1:29am Mar 4, 2007 1:29am
Quoting StockKJay
Mark, this was a great post. My indicators will give me bad trades, there is no denying that. Your example of Friday I do believe was a reference to a ***/JPY pair, you are correct, most technical indicators on less than a 1hr time frame would have certainly given a bad trade. Mine did. Though it also gave me the second push down. So long as the avg is + instead of -, = happy me.
You have a good weekend yourself.
This is 30 Sec time frame...
http://img236.imageshack.us/img236/6673/eurjpytm9.png
  • #17
  • Mar 4, 2007 1:32am Mar 4, 2007 1:32am
Quoting Mr Trend
I teach Woodies CCI in our Forex room in the evenings...
Information Security guys are good at trading ForEx and using CCI?... LoL
  • #18
  • Mar 4, 2007 5:56am Mar 4, 2007 5:56am
Quoting StockKJay
I really never knew this. After months of looking at RSI (told it was a "leading" indicator), I found out tonight it was simply a quick EMA. No wonder I never figured out how to intigrate it. For instance, 1 ema = 21 RSI. Then just to calm myself down I checked the stochs, these are also just smooth MAs. Oscillator (sp), again an EMA. For a twist, MACD is a WMA. What is the point of all these indicators if all they are all MAs? Wouldn't it be best just to use MAs? I suppose trend, support, resistance lines are not based off of MAs, I don't know if ADX (seems to not be) is based off of MAs or not.
Go to Investopedia.com and look up RSI, Stochastics, MACD, or any other indicator, you can see exactly how they are calculated in most cases.

If you take a closer look, you'll see times when price is going up, but MACD and / or stochastics are going down. MA's could not do this.

Stochastic doesn't average prices at all. %K plots where the close is relative to the high and low of the specified period. %D is an average of %K.

Hope this helps calm you down.
  • #19
  • Apr 5, 2007 6:05am Apr 5, 2007 6:05am
MAs are one thing, the MACD, CCI, stochastics, RSI, etc. are all different indicators. Each has its own mathematical formula. The formulas are not equivalent which is why each indicator behaves in different ways (although there are a lot of similarities too.)

Some of the oscillators use MAs in their construction, but they are not strictly speaking, moving averages.

For example: The MACD line is the difference between two EMAs. e.g. MACD(12,26) = EMA(12) - EMA(26). So the MACD measures the distance between the two EMAs (but the distance can be positive or negative meaning it gives not only distance but also tells you which EMA is on top). When MACD = 0 (you get a zero-line crossof the MACD), that means that EMA(12) = EMA(26), so this is equivalent to the two EMAs intersecting (crossover signal). When MACD is rising or falling, it means the distance between the EMAs is getting bigger. The MACD signal line is simply a moving average of the MACD line.

Stochastics on the other hand is a completely different indicator alltogether. The %K line measures the "current range" (i.e. the distance between the current price and the lowest low for the past n periods)...as a percentage of the total range (highest high minus lowest low) for the past n periods. What does this mean? It means that if price is AT the high of the range, then %K will be at 100% (usually considered an overbought signal). And if price is currently at the low of the range then %K will be at 0% (an oversold signal). This range is a trailing range, in that it is always the range of the past n periods, whatever that might be. The %D line is simple a moving average of the %K line, it's just %K smoothed out a bit. E.g. Stoch(5,3) looks at the range of the past 5 perdiods. %K = 100*[C - Lowest low (of the past 5 periods)]/[Highest high of the past 5 periods - Lowest low of the past 5 period]...and %D = a 3-period moving average applied to the %K line.

Here is a major difference between MACD and Stochastics: There is no limit to how high or low the MACD line can go (because there is no limit to how big the distance between two EMAs can get)...it is an "unbounded" indicator. Stochastics, on the other hand, is a "bounded" indicator. The %K line cannot go above 100% or below 0%. This is because the current close price cannot be higher than the highest high of the past n periods...the highest is can be is if it IS the highest high.

CCI is again something completely different. It is based on the mean deviation of the "typical price" (typical price is the average of the high, low, and closing prices for a given bar)...from a moving average of the typical price.

Yes. Many indicators use moving averages in their construction, but these moving averages are often not applied to price directly, instead they are usually applied to some function of price.

It is important to really get to know all the signals and characteristics that an indicator can display. Know what signals are reliable and which ones are not. Know how a signal can fail and can quickly turn to mean the opposite. Different traders will interpret the same indicators in different ways (much like price itself).

My suggestion would be to pick one or two of your favourite indicators and really learn its behaviour...learn how its signals relate to price action. Learn how some signals can imply more than one possible outcome in price action. Get to know them, they're really not all just moving averages of price. But hey, the moving average is a great indicator too.
  • #20
  • Apr 5, 2007 7:28am Apr 5, 2007 7:28am
How do indicators help to determine trend - same with MA - where is likely retracement within that trend. Enter there! Where are you wrong - stop loss there! What is ATR on your timeframe - trail using a measure of it.

1 Example - RSI Divergence - Many look at this as trend change - is it really telling you that trend is changing right now, or is it telling you that price may be a bit over extended. If price is a bit overextended what does that tell you about what the trend is right now. If price is going up and you have a divergence, there is no greater sign that we are in an uptrend. Divergence is followed more often than not by more and more divergence and longer term trend continuation after a pullback.

Not saying to base complete trend determination by one method, but once you have solid methods all pointing towards the same direction of trend, make sure you are entering in that direction. All that is left to do after that is simple MM.

Good luck!
Man who scratches ass should not bite fingernails
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