Technical Indicators Completely Useless?

Trading Discussion
1

Hi Guys

I believe the following indicators have nonexistent predictive power; RSI, Stochastic, MACD, Bulls Bear & ATR for long term profitable trading.

Random test in Strategy Tester - Generate a random integer, if the number is Odd trade sell if it is even Trade Buy. Take one trade at a time.

Take Profit = 30 Min ATR + Spread || Stop Loss = 30 Min ATR + Spread i.e for a buy TP = Ask + ATR + Spread. SL = Ask - ATR - Spread.

Tested over one year 13,300 Trades in total the result yields 49.56 % Success (Win) Rate. 10 maximum consecutive losses. So flipping a coin yields circa 50% Strike rate.

Side Note: Separately tried an 11 step Martingale on GBPUSD with account balance of £10,000, Random entry as above 6 pips TP and SL and profit per trade of £3.10, compounded daily. Results were circa 1.5% or £150 a day to begin with. Account balance grew to £320,000. But problem is that if I lose 11 times in a row I would lose £6,40 or there abouts (if I wasn’t compounding) and losing 11 times in a row whilst very unlikely is ultimately inevitable; could you take that risk?

Coming back to original point. I decided to run the random entry trades again,but this time every time a trade was entered, I recorded the D1,H4,H1,M30,M15,M1 values of the above indicators at their standard/default smoothing levels.

reviewing the data in excel I noticed that I could not improve the performance of my trades by more than 3% by applying a filter individually to the indicators and checking against the ultimate direction of the trade (Close Up or Close Down, irrespective of whether TP or SL)

I cannot see the point of using these tools. In fact I created a custom indicator with M15, M30, H1 layers of the RSI, MA of RSI, and Stochastic Oscillator. It send me a text when they all confirm a direction. Testing this indicator’s performance yielded a 39% success rate…or…worse than flipping a coin.

I have so far made roughly £4,000 using the custom indicator for the last 3 weeks (the definition of beginners luck). I look at the chart and decide to get in on the signal or not. Since doing the predictive tests I have decided to suspend trading with the custom until I can get something that is at least 65 - 70 % right off the bat.

Please tell me your thoughts

2

Yeah, I find MACD, RSI, and Stochastic, among any indicator to be very on and off with how accurate they are. Because, even if they are correlating mostly correlating they can often change the opposite of what they were saying very quickly.

What I’ve found was, the RSI virtually is pointless on the 15minute-4hour time frame. It will often stay high or low if the trend is just too strong. Yet, on the daily, it can be somewhat accurate to show that a small reversal may come into play within the next day to three days.

The MACD to me is almost completely random. If the MACD lines are negative the trend tends to be on the downside, or visa versa if they’re positive. But from my experience with the MACD, is that it the most important factor is only whether its negative or positive. Price action often negatively correlates with it too often, but it seems to respect the long term trend of what it says on whether the MACD lines are on the positive side or negative side, you just have to find the best possible entry position. I feel this is better represented on larger time frames, because on smaller time frames it often will suddenly change what it was saying not too long ago very quickly.

Stochastic, for me, has been the most accurate on the smaller timeframes for short-term holds, holding your position anywhere from 15 minutes to 1 or 2 hours. This seems to be especially true when you try and correlating the 15 minute time frame, 30 minute time frame, and hourly time frame together. If all three correlate direction or reversal for the most part, it often has been a profitable buy opportunity for me. Then use the 5 minute to find the best possible position to enter that short term trade. For a really high percent accuracy, it’s best to have the 15 minute and the 30 minute lines already both crossed and beginning to move forward (especially over the overextended line, or under the oversold line). This will basically guarantee short term direction. Then if the hourly is on your side as well, that is a good sign as well.

With Stochastic about one or two weeks ago I bought 4 different currencies (on a paper trading account) solely based off the daily stochastic. Then I just forgot about them for about a week in a half or so. Then checked them two days ago and they it has a 50% accuracy. Overall P/L on this was about a break even.

EDIT: just adding this last thing, the more time frames a stochastic correlates on, the more accurate it seems to be. (obviously)

3

Thank you for this post. I think one approach might be to continuously test the accuracy of the indicators in real time. I was using a simple RSI to MAofRSI cross to get buy and sell signals, with a chart that looks similar to the stochastic but lagging more; that would not work as you said in a strongly trending market where the values are overbought or oversold for extended periods.

But trying to describe that situation programmatically would be a challenge for me. Could you think of a way to describe a simple test to review the predictive ability of the Sto or RSI, maybe cross to cross on either versus the price action in that period, going back 10,20, 50 crosses…

4

Yes, they are useless. Indicators are ridiculous except the simple moving average, but even this is only for a quick look at the bigger trend, nothing more, and your eyes can do the same thing. Oversold, overbought, useless, as they are depended on the timeframe you’re looking at. This is why programmers are often bad traders, as they focus all their mental efforts on programming useless indicators and EA’s, which are nothing but filters of price. (Although I love me some non-price related stuff like alerters and auto lotsize calculators. So programmers are great, don’t get me wrong…) Even volume is useless, since you don’t know if the buyers or the sellers are the active ones. It simply translates into more volatility, which offers no predictive capacity. (Prediction = leading = edge, indicators = lagging = no edge). However, there is one tool (which some call an indicator but it’s not, it’s just a tool), which I cannot trade without, and this is the fibonacci extentions. Although I only use the 161.8 and 261.8. (All other numbers I have deleted.) I will give you an example of a trade I took today:

template trade real deal 12.jpg700×345 17.8 KB

Some will say fibonacci is bull****, but that’s only because they’re looking at the wrong numbers and are drawing it wrong… The golden ratio tells you how far price is gonna EXTEND (true support/resistance) before making a reversal (small or big, doesn’t matter, edge is edge and if you only go for the big fish, then all the small fish will eat your bait = money), as markets, like nature, don’t shrink, they grow and grow and grow (extention). This is why I ignore contraction points like 0.382 and 0.618, which most people using fibonacci focus on sadly.
So yeah, as you can see on the chart there are clear support/resistance levels, BUT the question is, WHICH ONE IS GONNA HOLD? And that, my friend, is where fibonacci comes in, in particular, the 261.8!
(And yes, I like the color blue :cool:) Let my profits run you say? I never let em run. 1:1 risk reward no bull****. Why should I let my profits vanish away because the greedy gambler in me like is not happy with the small fish he caught? It’s not like you can’t enter a 1:1 trade later again anyway… And that’s what it’s all about, ENTRY. Indicators, because of their lagging/reactive instead of predictive nature, will always make you enter too late, and that is why you will loose money as you have found out with your backtests. This is the same reason why it’s always some bull**** indicator system scammers are selling, because they have been unable to make money trading it, they found they can make some selling it…

5

They will.

Some of them, I don’t doubt.

Others have read [I]many[/I] independent, academic studies, not one of which has ever shown that Fibonacci has any value at all, have themselves never seen anything other than anecdotal, cherry-picked “evidence” for Fib levels, are distinctly uncomfortable with belief-patterns for which endless, objective, unbiased research has never produced a single shred of realistic evidence, and have therefore come to the conlusion that they almost certainly have no more objective reality or significance than randomly-drawn levels.

[B]Redirect to Lockhaven.edu

I certainly won’t dispute that view, since I share it. :wink:

There’s an overwhelming panoply of anecdotal evidence for astrology, too: millions of people, worldwide, believe in it; tens of thousands of people make their livings from it; thousands of books have been written about it; hundreds of thousands of people absolutely swear by it, and so on.

But it’s still bull****. :slight_smile:

6

Hey man, I’m more of a scalper when it comes to trading. Like I usually get 5-30 pips per trade, holding for approximately 10-30 minutes on average. I use 4 indicators, primarily just two, the other two are just for a glance to help understand the overall trend. Then the I use 3 types of support and resistance lines. One of those three support and resistance lines is from a strategy I came up with solely on my own, and by far correlates and supports the indicators the best, I mainly use it to understand how far a breakout/reversal will extend to. Best part about it is that it tells you where the breakout/reversal will end and retrace back to the stronger support and resistance levels (the other two support/resistance levels I look at). But if those two indicators are holding strong, they will likely breakout through the weaker type of support/resistance levels I find through my strategy, to the next weak support/resistance line found through my support/resistance finding strategy before it retraces back. That’s only if you want to hold for that breakout, you could just take profits/partial profits instead. Almost forgot, then time frames are extremely helpful with this strategy as well.

Through this scalping method I’ve even profited 84 pips holding a position for somewhere between 15-30 minutes, don’t remember exactly how long it lasted, but between that time range.

Then I have one more strategy I use for my longer term holds that are no more than 8 hours to 3 days long. Which is basically spot on for catching a long term reversal.

EDIT: Thinking of sharing my scalping strategy possibly/and how to catch a quick long term reversal (by long term i mean 8 hours too three days time). Should I make a thread on it? It’s often got very good accuracy, was testing it with

7

Hmm… I don’t use Fibonacci too often. Partly because the majority of the people on TradingView who show their chart analysis’s are always way off. Since then I’ve had a bias against Fibonacci, no matter how popular it is to Forex traders. Then again, they may have just been incorrectly using it, or were abusing other factors they may cause different price fluctuations.

8

Ok, not to sound too despairing but what is the hope for trading if you can’t get even a 10% move on predictive performance using the most popular Indicators.

I wrote a simple 6 step martingale EA that achieves 10% return in roughly 5 - 10 hours in the day on any currency pair with 80% probability.

the other 20% of the time you lose up to a maximum 40% on your account balance. The EA can be adjust of course (5% return @ 80% to 20% loss etc…)

I might just use this from time to time when i’m short of holiday money

9

Sounds like it can break even, then, perhaps excluding dealing-costs? Out of every ten trades, it can make 80% and lose 80% … where’s the edge in that?? :33:

10

There is little. it will make you money long term the fail rate is more like 18-19% not 20. however the probability of losing two days in a row in less than 3%. So you could cover your lose days by increasing your risk x4 the day after you lose to make it back, two layer martingale i guess.

I’m sure if you scratch your brain enough you can find a way to make it work.

– Maybe try a random trade with a trailing stop. if the strike rate is 50% on random trades Maybe I can make money by reducing the value of my losses by the marginal moves of each trade in the positive direction.

11

I understand your point in being able to make human decisions through experience etc… that could not be captured easily in a program (almost like a heuristic) but comparing raw trading to program trading I think a hybrid approach is the best option, programming enables you to rule out non starter trading ideas of the bat.

to continuously and simultaneously review every available currency pair offered by your broker for the right setups, make sure you’re spreading your trades across a set of uncorrelated pairs, log screen shots of all your trades to improve your learning curve on what works and what doesn’t and every other thing you can thing of to improve your long term odds.

12

When I scalp I only trade fast moving currencies. I tend to get 20+ pips on average with a 90% accuracy. Even if I chose to trade the wrong way, I always just switch it up and end up profiting. Issue it’s more time consuming than longer term trades. I often make about 20 trades in an hour time span. Small gains add up. But then again, I also do swing trades.

I wouldn’t suggest increasing your risk to recover a loss. I find myself to be more reckless after making a loss and too eager to make it back as soon as possible. So, I actually decrease my next trade after making a loss. Then go back to my normal trade size. Yet, my trading sizes are never the same. It depends the type of trade I’m making, day trade, swing trade, quick scalp, etc. The specific strategy, and which currency pair I’m trading.

13

Quite right…

Here is a useful former thread on Babypips:

http://forums.babypips.com/newbie-island/75229-fibonacci-retracement-whats-next-astrology.html?highlight=Fibonacci

14

Thanks for the thought, but I have an aversion to allowing position-sizing to be dependent on the outcome of the previous trade, and an even bigger aversion to increasing the position-sizes when I’m losing. If a system doesn’t have an edge to start with, one can lose but not gain, overall, by increasing the stakes after a loss.

If a system does have an edge, it doesn’t need Martingale techniques, and if it doesn’t have an edge one shouldn’t be using it in the first place.

15

That’s silly. There is no such thing as a system with an edge. That is only a human with experience or ability to decipher the winning trade more often than not in the long run;as a start. risk management and money management then prod your account balance up with that edge or toward the toilet.

martingale techniques are just another basic risk management approach. and you fundamentally you don’t position size up after losing because (as a human trader) generally when you’re losing, it tends to be in streaks, either you’re off your game or your setups are not suitable for the market. That is precisely why the probability of losing given that you lost the previous one goes up rather than down (the results from recording 400 of my live human only trades).

Clearly indicators are close to useless in improving performance. The only non knife edge to your wallet you’re going to get is as an institutional trader with much more market visibility, spread setting ability, institutional research, and comparatively unlimited funds (gamblers ruin).

How does your system with ‘edge’ let you know that a big cross border merger is coming that is going to lead to large FX market orders from the principals, arbitrageurs, and tag along speculators creating a multiplier effect. It doesn’t.

I think the only realistic consistent profit a retail trader can make is based on market fundamentals in the medium to long term, technical only to to nit pick entry points.

16

…you will never know how many good threads

you could find on your chosen topic, lurking in

the forum archives, such as this one:

http://forums.babypips.com/newbie-island/42965-do-professionals-traders-use-technical-analysis.html

17

Thanks for the info, high frequency algo trading to take prop is non existent in banks. The props are incidental only in making the market. the algo simply try to calculate the risk and set the spreads. the old school phone traders use similar computation to aid more traditional market making, typically for bigger client orders outside the max transaction size allowed to be placed by the Quants team.

They don’t use leverage and have much more money to work with, where a 2.4% return is actually meaningful. Most of the traders on the Barcap desk I interned with a millennium ago focused exclusively on one currency pair each. The main aim was to create a market for clients or achieve very marginal gains on an instruction from a client by beating the VWAP for the period considered.

Not the kind of return that would interest a retail trader but significant to a clients’ bottom line if they need $m ~ $b foreign currency to service their international operations.

18

I agree that a hybrid trading is the best option.

But, i completely disagree with you that “the only realistic consistent profit a retail trader can make is based on market fundamentals in the medium to long term.”

I do zero work looking into fundamentals, and solely trade based off indicators, support and resistances, and technical analysis, and have had very good consistency. It’s really just whatever your style of trading is that works best for you.

20

And obviously you’re quite right to do so. :wink:

(I probably won’t post further, in this thread, though: once the response to “If a system does have an edge, it doesn’t need Martingale techniques, and if it doesn’t have an edge one shouldn’t be using it in the first place” was “That’s silly”, it became pretty clear that any prospect of intelligent - or even polite - discussion had disappeared. :rolleyes: )

21

I agree!

In the end, people can sometimes get into arguments in forums for entirely irrational reasons (mostly us men, who claim to be ‘more rational’… ha!) which have little do with fact and more with a drive for
recognition and for being right while the next forum user is shown to be wrong, with a need to impose our views with some backing of knowledge (real or presumed)…

Truly, none of us is ever knowledgeable about everything… hell, when Dr. Lexy or Peterma or Clint
or ClarkFX speak, I am silently humbled and just prefer to listen… Yet other people will probably not tolerate being told something they clearly do not know and will retaliate…

Okay, this was not one of those situations… clearly…

However, it is better agreeing to disagree than to get into fistfights over something theoretical…

The worst thing a trader can hear him/herself be told on a forum is : you are a loser / unsuccessful…

So when someone is told that their edge is actually not an edge, that can really get them worked up,

and they may try to prove their success rate… Truly, without some sort of audited record (except perhaps

MyFxbook), none of us here can prove that what they say about their trading performance is actually true…

Therefore, trust must be gained by being as open to other forum members about our struggles and our

trading life, which makes us much more engaging as forum contributors than people who shout their

greatness atop these pages and then, when other members start telling them to get a grip on their arrogance,

decide to leave…

PEACE