I think your approach is sound. Any trading methodology whose framework is based on Fibonacci retracements/extensions is certainly valid, in my opinion. The problem with most of the beginners on this board, is they do not spend enough time on any one method. Most people jump from indicator to indicator, time-frame to time-frame, and method to method.They will use something for a few days, but as soon as they experience a few losing trades, they will move onto something else. It's a never ending cycle, where the person never spends enough time on any one method and never really gets to understand how to execute it properly.
Whether your methodology is " better" or not than mine, or Fat Tails, or any other trader, is not relevant. What's important is that you have created an approach to trading that is relevant to you, and have chosen the tools that make sense to you. It takes many months if not years of exposure to patterns to make them your own, but " If you really want to do something, you'll find a way. If you don't, you'll find an excuse."
Last edited by tigertrader; March 31st, 2011 at 08:39 AM.
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What's not mentioned anywhere inside this thread, is the fact that when the average trader says the word "indicator," what they typically mean is is a lagging indicator based on mathematical averaging. This is where most of the 40+ year old technical indicators live; in the land of Mathematical Average. So, by definition, their output depends on input that is lagged. However, that fact in and of itself does not make those types of indicators completely useless, it just makes them less than optimal.
What we are really talking about here is a word that no one has used yet: Innovation. More to the point, the lack of innovation. We don't like to use that word in trading, because innovation sounds too much like "holy grail" and that phrase has become something to be avoided by many traders. Despite the disdain for the phrase "holy grail," innovation is what moves most other industries beyond their previous "glory" and on to their "next level" of existence. Take the classic case of the Cell Phone. Remember this guy:
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They called it the "Brick" back in the 80's and this was state of the art back then. You were considered to be on top of your game, if you walked around with one of these on your person. Well, that's kind of like what 40 year old technical indicators are like today: Antiques. It still works, but it is not optimal technology.
Another thing not being discussed in this thread is the concept of trader "type." Tell a Hyper-Day Trader that he should be using the 200MA and the 50MA, by way of an extended range Stochastic Oscillator and you'll get a blank stare back at you. At the very same time, tell the long range Swing Trader to drop the 200MA/50MA and start using multiple hyper-short range Stochastic Oscillators within the same indicator window and you will most likely derive that same blank stare. Even still, tell the Intermediate Range Trader to drop the indicators altogether and start using "Price Action" to determine entries/exists and somehow, that same blank stare will come to their face. So, depending on the "type" of trader you happen to be, logic will dictate the type of indicators that are best suited to derive the results you are after and/or more appropriately, the type of result you expect.
Another (very critical) thing not being discussed here is the idea of "Expectancy," or how positive expectancy is derived from trader to trader. If the trader has an expectancy of X, but is using a set of indicators that are not capable of producing X, then that trader will typically conclude that those indicators don't work. Why? Because the expectancy is not being met at a high enough rate of occurrence to satisfy the trader's needs. So, what's the solution? Change the expectancy -OR- change the indicators being used. Typically, the answer is to change the expectancy to "fit" the production quality of the indicators in use. Some traders feel that they are not really trading, if they are not making 100+ pips per trade. Yet, there are some traders who have found a away to meet their expectancy threshold by netting no more than 5-7 pips per trade. All of this depends on the mindset that the trader brings to the market.
So, do 40+ year old indicators still work? Of course, they do. They work within their range of capacity. They do what only they can do and they will never be able to do anymore than that. They produce a certain frequency of success and they will never produce anything beyond that. Therefore, the expectation must be set accordingly. Setting the wrong expectations with 40+ year old "Bricks" is like trying to successfully conclude a mission to Mars, using 1970's space shuttle technology. The shuttle was cutting edge stuff when it came to taking relatively lightweight payloads into low earth orbit (LEO), but it won't take us to Mars and back.
For that mission, we will need a different kind of vehicle, based on a different kind of technology that gives us a different level of expectation and thus, a different definition of what works and what does not work.
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My initial post referred to this type of indicators and I agree with you.
Predict future prices with past prices?
Most so called indicators in technical analysis extract some information of past prices to predict future prices. This does not always make sense.
-> any indicator, such as a moving average, conveys less information than price itself
-> future prices can not be entirely predicted from past prices
-> in markets that follow a lognormal distribution, random price movements outweigh contingent moves
-> auto-correlation and pattern frequently change, so the famous backtest is no guarantee for a likewise behavior in the future
The moving average with the period n contains some information, it tells us where the average price was n/2 periods ago. This is not very interesting. However, if a bunch of technical traders use that moving average and declare it an important support for price action, that declaration becomes self-fulfilling.
This is not the realm of science, it is a simple game, where participants hide their intentions and try to anticipate - front run - the moves of other participants. It comes back to Keynes beauty contest, all your focus is on selecting the girl from which a majority thinks [that the majority thinks ....] that it will be elected.
Use other information instead
I do not see a class of 40-year old indicators and a class of modern indicators. Sophistication in this field does not give you a lead. If the super-duper indicator is just another transformation of price, you can well stay with a simple moving average. However, what can give you a lead, is to use information different from price. Markets appear as random, because the sheer number of nonlinear interactions makes it impossible to evaluate them mathematically. What can be evaluated, is the behavior of market players, as they tend to crowd.
Volume, open interest, put/call-ratio. cumulated ticks and other intermarket indicators can be more useful than just another fancy indicator calculated from past price alone.
Last edited by Fat Tails; April 5th, 2011 at 04:05 PM.
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