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Underexposed view on use of Indicators and Overlays
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Underexposed view on use of Indicators and Overlays

  #1 (permalink)
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Underexposed view on use of Indicators and Overlays

It is not without some hesitation that I have in starting this new thread. I know that the overwhelming sentiment here is that Indicators and Overlays on charts are useless and misleading, but I do not have that view.

I have studied charting for over a decade seriously and another decade before that as a curiosity. Technical Analysis to me is integral to the way I choose stocks. If you look at my other 2 journals on Canadian and American stocks you will see many many examples of the charts I have developed and how I use them.

In those journals, I have fantasy portfolios but they are not based on SIM data... they are based on real data and I try to make the transactions in these portfolios as real as possible. I announce my trades at least hours and often the day before I would submit them for real and if the share price passes through the value of my bid or ask I assume my trade would have completed. You can see by my bi-weekly summary of the portfolios that I am not 100% correct and my profits and losses are there for all viewers to see.

I am a long term swing and investment trader. However having said that I believe my approach can be adapted to intra-day trading as well... sometimes with modification often with none.

I use time charts not tick charts. For tick charts you need a lot of transactions to be useful and as I see it from a distance anyway this is more useful in commodity futures and FOREX. But I think their usefulness in normal equity stocks to be limited at best unless several million transactions are executed in a day of trading consistently.

I hear about how useless indicators are here (blanket statement) and frankly when I look at the charts of other chartists (here and on other sites) I see a lot of pretty colors, lots of lines and very confusing discussion.

I like clear easy to read charts... charts that focus on a max of 3 indicators that don't duplicate a look and 3 overlays.

You will also see that I do not use all indicators for their original purpose or original interpretation or "preferred" parameters for using such indicators. This is a result of my last decade of use and study...and it is still ongoing frankly as I added a new indicator to my suite - Force(100) - when I realized it gave me better information than CMF that I had been using for years... so charting to me is an evolving organic process... not static.

It will take a long time to fully discuss all I have to say about indicators and lots of examples to illustrate what I see and how I interpret what I see.

I love POSITIVE discussion and that does not mean a "yes-man" approach, but I am not above placing a person on ignore if after a few warnings that the conversation is not going in a direction, that I am not comfortable, continues.

I would like to extend the discussion from long term charts to intra-day charts. At the end of a discussion of a particular indicator/overlay it would be interesting to see if they REALLY apply to TICK charts. I see a lot of attempts to apply time chart indicators to TICK charts but no evidence there is any validity in using them... My gut feeling is that many would not apply as the amount of time data in one tick varies so much and does the closing value of these ticks have relevance to an indicator? I am not sure but I am willing to look at examples of such charts to offer a comment...you will have to post example charts though as I have no access to such charts.

I look forward to this thread... by documenting what I do this way and the discussions that hopefully follow in a constructive way, I learn as much as hopefully I teach.

My first discussion will be on a very important overlay in my books.... Bollinger Bands and one of its associated indicators - Bollinger Band Width.

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  #3 (permalink)
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Bollinger Bands - BBs or Bollies


Bollinger bands, also known as BBs or Bollies , were developed by John Bollinger in the 1980's as a way to measure volatility in a stocks price. You will see this overlay on most traditional charts and discussed in books on the subject of Technical Analysis (TA) but this important overlay rarely rates more than a one page description of the function of overlay and rarely again much of s discussion of the interpretation of a chart using this overlay... other than to say that the Bollies are a measure of volatility of the stock price.

I would devote a whole chapter to this subject...not just a page...Bollies are just that important to me. This overlay gives many clues by itself... but the real power comes when it is used in conjunction with other indicators... specifically MACD and Slow Stochastics but I am jumping ahead of myself here.

What can I learn about a stock price using Bollies??

1. How volatile a stock price is...

This is pretty much all that is discussed when the subject of Bollies comes up... and it is true. Why is this important? Because times of low volatility usually precede breakouts in price.

It is like watching a cat as it hunts a mouse. You don't see it running madly at the mouse to catch it... the cat stalks the mouse waiting for the proper moment to pounce on its prey. When it is ready the cat goes into a crouch, ass-end wiggles then it leaps onto the target.

I view Bollinger bands like the cat of the TA world. You will see a discussion on this in a separate post titled "The Bollie Squeeze"

2. Determination of when a current Bull/Bear run is over.

Yes, I can reasonably predict when a run is over using bollies. Actually, I use bollies in combination with the other two indicators mentioned previously in my "trigger chart". It may not be an absolute top or bottom. It may be just a rest as the stock goes into consolidation after the current run is over. You must look for other indications for evidence of a potential reversal or continuation... but if you are swing trading or shorting a stock (I never short a stock as it complicates my taxes ) knowing when a run is over is important and allows you to get the maximum out of a particular run.

3. Predict pullbacks

This is important when a stock gaps up or down. Bollies can be used to identify situations when the volatility is a way out of line. Pump and dumps come to mind in this manner but there are other situations. Combined with volume those situations can be identified.

Or.. say you wanted to buy a stock but before you get your order in the stock price gaps upward... do you chase it or wait for a pullback and how much will that pullback be? You won't be perfect but you also should be able to buy such a stock cheaper and not chase it.... or chase it if it seems reasonable to do so from the analysis.

4. Identify head fakes

A breakout of share price is not always a real breakout... there are false ones as we all know. Bollies in combination with Slow Stochastics, MACD and BBwidth can identify these situations reasonably well.

As you can see there is a lot to talk about here... it will take at least one post on each point to understand my position on each of these points... be patient and you will understand this overlay and its interactions with others very well. I will describe this using daily charts and if I can I will use intra-day charts (you will find that I use different parameters and not all free software allow you to modify parameters)

This post sets the stage for an in-depth discussion of Bollies.

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Underexposed View Post
It is not without some hesitation that I have in starting this new thread. I know that the overwhelming sentiment here is that Indicators and Overlays on charts are useless and misleading, but I do not have that view.

I'm looking forward to your thread. I just started to seriously look at technical indicators. I'm not still convinced about them.
I look at them so far at the way of what NOT to do in certain market environment then what to do.
And I do not much understand them.

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Gambler View Post
I just started to seriously look at technical indicators. I'm not still convinced about them.

In this case, it's good you haven't learned them yet -- before you fall victim to pattern recognition fallacies discussed in the "Random Line Theory" thread, I suggest you watch this webinar:

https://futures.io/traders-hideout/35189-webinar-quantitative-discretionary-trader-art-science-w-adam-grimes.html

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

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  #6 (permalink)
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Big Mike View Post
In this case, it's good you haven't learned them yet -- before you fall victim to pattern recognition fallacies discussed in the "Random Line Theory" thread, I suggest you watch this webinar:

https://futures.io/traders-hideout/35189-webinar-quantitative-discretionary-trader-art-science-w-adam-grimes.html

Mike

Mike, I appreciate your answer but I want to learn them. It's part of my study of mob psychology.
My winning rate is 90% out of 100%. It's impressive for me. All it's based on big picture, analyzing of market condition, analyzing daily volatility based on current condition and current info and so on. I did not use indicators so far. They haven't convinced me yet. Also as a novice trader I do not go in a trade if I do not understand that. That helps me keep my winning rate high. So still want to learn indicators.

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Underexposed View Post
Bollinger bands,

1. How volatile a stock price is...

2. Determination of when a current Bull/Bear run is over.

3. Predict pullbacks

4. Identify head fakes

Is it possible to give some examples on that with charts?
I look at indicators as at the past. History repeats itself they say. I agree with that on a big picture but details. They always screw big picture. I'm kind of person that only trust what you have current. Still try to understand how the past can help predict future when we are talking about indicators.

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Gambler View Post
My winning rate is 90% out of 100%

Win rate is virtually useless and only something rookies focus so much energy on. Expectancy is what matters. For scalpers, it is important to also factor commissions as some poor souls pay 50% of their day to their broker (mine is more like 1-2%).

My expectancy YTD:

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Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
to support our community, become an Elite Member.

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  #9 (permalink)
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Big Mike View Post
Win rate is virtually useless and only something rookies focus so much energy on. Expectancy is what matters. For scalpers, it is important to also factor commissions as some poor souls pay 50% of their day to their broker (mine is more like 1-2%).

My expectancy YTD:

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Mike

I'm not a scalper. Commission were about 5% last year. I haven't read a lot of books about trading so do not know how to explain sometimes when people talk professional language. I actually finished only one trading book. All others went to garbage bin after few pages. Please do not judge me strict just allow to study indicators .

Thanks,

Gambler

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  #10 (permalink)
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Gambler View Post
I'm not a scalper. Commission were about 5% last year. I haven't read a lot of books about trading so do not know how to explain sometimes when people talk professional language. I actually finished only one trading book. All others went to garbage bin after few pages. Please do not judge me strict just allow to study indicators .

Thanks,

Gambler

I am sure @Underexposed's blood is boiling at this point, so I will bow out of this chain of replies.

But let me say, I am not judging you as a person as that would be completely unfair. I am judging the content of your posts, however, and to me it indicates you are a complete rookie. Only a rookie would get excited about a 90% win rate without knowing the statistic by itself is meaningless.

Let me leave you with this: How can you expect to outperform me as a trader with your current mindset? Everyone has to start somewhere, but right now you have not yet realized just how lost you truly are. Just don't make the mistake that most do - and never break that cycle. You can read in depth about it in this thread:

https://futures.io/elite-circle/11125-ask-any-trading-question.html

You need to out trade me, as well as countless others that are much better than me. If you can't, then I will out trade you - and I will take all your money in the process.

Enjoy your weekend, and be sure you fully understand the business you are engaging in.

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
to support our community, become an Elite Member.

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