Indicator’s TruthsDo You Want To Know The Truth About Indicators?
If you believe you can trade relying on indicators or oscillators you are making a big mistake!
In fact how many times have we found ourselves in front of RSI or stochastic of overbought values in excess of eighty and the market continued to rise, or exhausted by the considerable false signals by crossing moving averages have we turned off the computer? All traders have experienced these kind of problems with indicators, the most persistent ones have tried all sorts of indicators with poor results, whereas most of all have quit the trading.
It's essential to be aware that indicators are nothing but a good aid to trading activity and therefore it is useful to filter out the signals before placing an order. In order to optimize the use of indicators you have to know two basic truths:
They do not predict the future
The first truth is: indicators do not predict the future, they are built on past prices so they do not suggest any information for our future trade.
Let's take an example, all traders know oscillators (RSI, Stochastic, Momentum, MACD etc.), this type of indicators "fluctuate" in a range of values between 0 and 100, everyone knows how they work ie when the values are in overbought you have to go short and when the values are in oversold you have to buy, then why do most of them go on losing? The reality is: if an investment fund has decided to buy a bank, or has decided to sell the market it will go on its direction without caring about Oscillator value, in other words “the market is done by the big players and not by oscillators”.
Unique setting does not exist
Another failing truth is about indicators setting, many trading gurus suggest different types of settings, but the reality is different, a unique setting for all assets does not exist, appropriate statistical test should be run to see how a specific type of indicator acts on each asset. But the possibility of making a good statistical study by doing a simple search by eye directly on the charts has to be excluded, you must use the appropriate trading software on which to perform the back-test using reliable data and not the ones that can be found on meta trader ( see the separate article "why is it essential to test my strategy.").
the Analyst's answerJean Grossett - Financial analyst
A useful tip for the most part that cannot back testing indicators by specific software, this solution is to observe the volatility of the asset and work when it is not too high, because if it is high we will have a greater number of false signals on pretty all indicators. Other useful suggestions are to set the exponential moving averages rather than the simple ones, and also the standard deviation on bollinger bands should be set on two to three periods, in order to avoid many false contact signals.