Indicators. They make us feel good, they comfort us, we love to expect too much from them then call them useless when they fail to predict the future.
Or at least some people do. I myself find indicators comforting, or should I say they bring me relief. They can make every thing smoother, they throw numbers at us. The number is either above our threshold or below, the answer is binary. They give us certainty which is something we all crave in this seemingly random continuous dynamic flow of prices.
I am going to start with the indicators I always use, and then present a few of my favorite ones and describe what they do and what I think of them.
1- Fibonacci
Sometimes it gets called an indicator, sometimes it does not. Indicator or not there is not 1 buy or sell I do that does not involve a retracement, extension, or at least the measuring tool.
I trust my eyes alot, but if I was to trust them to know if we are at 50%, more, or less, my judgements would be all over the place.
The definition of a fib retracement that is given is a tool that allows analysts to find areas of support.
It helps me see where we are and where to enter a trend. 23,6% and below is too early for me, 38,2% is often a nice one.
Fib extensions let me see how far we really have gone, and helps with finding targets, or when to look for reversal.
Depends on the context on various timeframes, this includes alot of things, depends my goals, and the pair or commodity.
2- Average True Range (ATR)
I use this one all the time. This indicator measures how much the price has been moving in the past specified number of candles, including gaps.
"It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations."
I want to know how volatile the market is to help find out how "active" the pair is and other things, and to help define stop loss, entry, target.
If I am looking at a trend on the H4 and D1 timeframes and I want to ride it I will not want to buy a pullback of 1 H1 ATR. And target more than this too.
It can also be used to note how expensive - in spreads - a pair is: if the spread is 20% of the daily ATR, it will be pretty hard to day trade it.
Now, the ones I do not use often.
a- Moving Averages
Moving averages are indicators that go on the chart and show what the average price for a certain period & timeframe is over time.
The smooth out noise, and provide indications to determine what the direction of the trend is.
There are several types of moving averages: Simple, Exponential, Smoothed.
I do not use them.
First of all my eyes are trained to detect trends and find what I want to see in the price quickly.
Second, I am interested in vertical moves, both for going with or against the trend, am I so picky that the price clearly is past MAS.
Third, once I identified something I like I will do a full analysis of it, very detailled, precise, using MAS would be ridiculous.
b- Relative Strength Index, MACD, and Stoch
Ah one of scammy "vip educators laptop on the beach lifestyle" & novice investors favorite.
Those momentum indicators show strength, with alot of lag, and poor precision, the MACD also has additional info I will not get into.
Some bad unprofitable market participants use it for "oversold" readings, meaning they will consistently buy in downtrends.
I look at them sometimes mainly because I think they look good. They look "professional", and they can be conforting, seeing divergence triggers the rewarding center.
But I would not seriously incorporate them in my activities.
c- The Commitment of Traders
It is a report that shows the open interest of participants in the futures market.
A simplified version such as in the example below can help make decisions to buy long or short contracts.
While imperfect (a big hedger with a small speculative position has all counted as "commercial") and general, it can help with one's study of a commodity.
For example, gold was over-shorted at the bottom in August 2018.
d- Average Directional Movement (ADX)
This indicator that was designed for commodity daily charts can be used for about everything, and it shows the strength of a trend.
It does so by measuring the amount of price movement in a single direction.
Wilder suggests that a strong trend is present when ADX is above 25 and no trend is present when below 20.
I think it is better than the RSI or worse Stoch & MACD. In particular in the following example with the smoothed version (25 DI length), otherwise it can be all over the place.
I see how it could be used with an alert (when value > 25) to warn an investor a trend might be happening. Also to help filter consolidations many want to avoid, if the eyes are not trained yet to a naked chart, or if the investor is not disciplined.
e- STDEV & Implied Volatility
Standard Deviation is a statistical calculation used to measure the variability.
Implied volatility is a metric that captures the market's view of the likelihood of changes in a given security's price.
The VIX is a market index that tries to project the expected volatility (downwards because that's all they care about) in the stock market.
I do not care much about those values. ATR + Fib + Measuring tool etc are better.
f- Bollinger Bands
These bands envelop the price using a moving average (20SMA) and standard deviations away from it.
"When the bands tighten during a period of low volatility, it raises the likelihood of a sharp price move in either direction."
It is supposed to help visualise tight periods before a big move. And the price often stays between the bands (that's not very helpful).
Sometimes when the price really gets tight with BB it really hits the eyes (Bitcoin), the small range and then the massively expanding one.
I do not really see the use for it. Bollinger Band users blind much? I have no use for them but they sure look pretty.
g- Volume for Stocks & Crypto
Good luck using volume with Forex. Volume tells us how much activity has happened. Did the price go up with only a few buyers? Or were there a whole lot of them?
Is a support strong: Many participants are watching it? Or only a few = not that strong.
There is a whole lot you can deduce with volume, but it is not the holy grail either. I rarely use it because the Forex market is OTC and we do not have that data, and with futures, it is rarely that useful.
h- On Balance Volume (OBV)
OBV rises when volume on up down is bigger than volume on down days. Its creator thought that volume precedes price.
It was designed to help detect bottoms with divergence, and spot smart money (big institutions) buying while dumb money (retail) was selling.
I doubt it will make the dumb money (that all think they are this special wonderboy) outsmart the dumb money.
Retail investors are likely to call bottoms every 2 weeks and chase bottoms and get giga rekt in the biggest bear market ever.
Maybe a good idea to go short when there are bullish signals in the future? I can already picture greedy and overexcited "investors" chasing every single "signal" they see. There will be many pullbacks in the big downtrend.
Or at least some people do. I myself find indicators comforting, or should I say they bring me relief. They can make every thing smoother, they throw numbers at us. The number is either above our threshold or below, the answer is binary. They give us certainty which is something we all crave in this seemingly random continuous dynamic flow of prices.
I am going to start with the indicators I always use, and then present a few of my favorite ones and describe what they do and what I think of them.
1- Fibonacci
Sometimes it gets called an indicator, sometimes it does not. Indicator or not there is not 1 buy or sell I do that does not involve a retracement, extension, or at least the measuring tool.
I trust my eyes alot, but if I was to trust them to know if we are at 50%, more, or less, my judgements would be all over the place.
The definition of a fib retracement that is given is a tool that allows analysts to find areas of support.
It helps me see where we are and where to enter a trend. 23,6% and below is too early for me, 38,2% is often a nice one.
Fib extensions let me see how far we really have gone, and helps with finding targets, or when to look for reversal.
Depends on the context on various timeframes, this includes alot of things, depends my goals, and the pair or commodity.
2- Average True Range (ATR)
I use this one all the time. This indicator measures how much the price has been moving in the past specified number of candles, including gaps.
"It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations."
I want to know how volatile the market is to help find out how "active" the pair is and other things, and to help define stop loss, entry, target.
If I am looking at a trend on the H4 and D1 timeframes and I want to ride it I will not want to buy a pullback of 1 H1 ATR. And target more than this too.
It can also be used to note how expensive - in spreads - a pair is: if the spread is 20% of the daily ATR, it will be pretty hard to day trade it.
Now, the ones I do not use often.
a- Moving Averages
Moving averages are indicators that go on the chart and show what the average price for a certain period & timeframe is over time.
The smooth out noise, and provide indications to determine what the direction of the trend is.
There are several types of moving averages: Simple, Exponential, Smoothed.
I do not use them.
First of all my eyes are trained to detect trends and find what I want to see in the price quickly.
Second, I am interested in vertical moves, both for going with or against the trend, am I so picky that the price clearly is past MAS.
Third, once I identified something I like I will do a full analysis of it, very detailled, precise, using MAS would be ridiculous.
b- Relative Strength Index, MACD, and Stoch
Ah one of scammy "vip educators laptop on the beach lifestyle" & novice investors favorite.
Those momentum indicators show strength, with alot of lag, and poor precision, the MACD also has additional info I will not get into.
Some bad unprofitable market participants use it for "oversold" readings, meaning they will consistently buy in downtrends.
I look at them sometimes mainly because I think they look good. They look "professional", and they can be conforting, seeing divergence triggers the rewarding center.
But I would not seriously incorporate them in my activities.
c- The Commitment of Traders
It is a report that shows the open interest of participants in the futures market.
A simplified version such as in the example below can help make decisions to buy long or short contracts.
While imperfect (a big hedger with a small speculative position has all counted as "commercial") and general, it can help with one's study of a commodity.
For example, gold was over-shorted at the bottom in August 2018.
d- Average Directional Movement (ADX)
This indicator that was designed for commodity daily charts can be used for about everything, and it shows the strength of a trend.
It does so by measuring the amount of price movement in a single direction.
Wilder suggests that a strong trend is present when ADX is above 25 and no trend is present when below 20.
I think it is better than the RSI or worse Stoch & MACD. In particular in the following example with the smoothed version (25 DI length), otherwise it can be all over the place.
I see how it could be used with an alert (when value > 25) to warn an investor a trend might be happening. Also to help filter consolidations many want to avoid, if the eyes are not trained yet to a naked chart, or if the investor is not disciplined.
e- STDEV & Implied Volatility
Standard Deviation is a statistical calculation used to measure the variability.
Implied volatility is a metric that captures the market's view of the likelihood of changes in a given security's price.
The VIX is a market index that tries to project the expected volatility (downwards because that's all they care about) in the stock market.
I do not care much about those values. ATR + Fib + Measuring tool etc are better.
f- Bollinger Bands
These bands envelop the price using a moving average (20SMA) and standard deviations away from it.
"When the bands tighten during a period of low volatility, it raises the likelihood of a sharp price move in either direction."
It is supposed to help visualise tight periods before a big move. And the price often stays between the bands (that's not very helpful).
Sometimes when the price really gets tight with BB it really hits the eyes (Bitcoin), the small range and then the massively expanding one.
I do not really see the use for it. Bollinger Band users blind much? I have no use for them but they sure look pretty.
g- Volume for Stocks & Crypto
Good luck using volume with Forex. Volume tells us how much activity has happened. Did the price go up with only a few buyers? Or were there a whole lot of them?
Is a support strong: Many participants are watching it? Or only a few = not that strong.
There is a whole lot you can deduce with volume, but it is not the holy grail either. I rarely use it because the Forex market is OTC and we do not have that data, and with futures, it is rarely that useful.
h- On Balance Volume (OBV)
OBV rises when volume on up down is bigger than volume on down days. Its creator thought that volume precedes price.
It was designed to help detect bottoms with divergence, and spot smart money (big institutions) buying while dumb money (retail) was selling.
I doubt it will make the dumb money (that all think they are this special wonderboy) outsmart the dumb money.
Retail investors are likely to call bottoms every 2 weeks and chase bottoms and get giga rekt in the biggest bear market ever.
Maybe a good idea to go short when there are bullish signals in the future? I can already picture greedy and overexcited "investors" chasing every single "signal" they see. There will be many pullbacks in the big downtrend.
