In this unit we’re going to talk about indicators. What are indicators? What can they do? Also, very importantly, what can they not do? We’re going to look at some common indicators, such as MACD, ADX, RSI, Stochastic and think about some ways that we might use them.
A time series derived from price data
- (OHLC and sometimes V)
- Might sometimes consider related markets or other data series
Vary in complexity
- Difference between two closes is a simple indicator
- More complex indicators could be thousands of lines of code
Historically, grew up with the rise in the easy availability of computing power
- At one time, calculating a moving average was a chore!
A Common Misconception
Many technical analysis texts (and websites) say there are leading and lagging indicators.
This is not true! Technical indicators are all calculated from (past and current) price data, so they reflect the past.
(There are leading economic and fundamental indicators, but there are no leading technical indicators.)
There’s always a tradeoff: If we try to make an indicator more sensitive to recent data it will also provide more false signals.
There are no leading technical indicators.
Guidelines for Using Indicators
Understand the calculation and tool you are using.
- Maybe should be able to do it by hand?
- At least have that degree of understanding.
- Names for indicators can be imprecise and misleading
Understand what it shows and what its quirks are.
If you combine indicators, be careful of overlap.
Categories of Indicators
- Moving Averages
- Parabolic SAR
- Williams %R
- Historical Volatility
Different Ways to Measure
- Chaikin Oscillator
- Williams %R
- Rate of Change
Using Line Crossings as a Signal
Using Indicator for OB/OS
Much More Is Possible
Can combine indicators
Can take indicator signals as entries, exits, or input to other stages of your process.
Indicators may be adaptive or adapted to cycles in the market.
Indicators may be calculated on other indicators!
- RSI of MACD, for instance
Understand what you’re trying to accomplish and what the indicator measures.
Indicators are calculated from OHLCV (and possibly OI) data.
They are usually visual presentations of processed price data.
Understand how the indicator you choose is calculated and what it measures.
These videos and accompanying educational materials (collectively, “the Educational Materials”) are created and authored by Adam Grimes (the “Content Creator”) and are published and provided for informational and entertainment purposes only. The information in the Educational Materials constitutes the Content Creator’s own opinions. None of the information contained in the Educational Materials constitutes a recommendation that any particular asset, instrument, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Content Creator is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the Educational Materials may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Any statements about income, expressed or implied, does NOT represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. From time to time, the Content Creator or its affiliates may hold positions or other interests in assets mentioned the Educational Materials and may trade for their own account(s) based on the information presented. The Content Creator may also take positions inconsistent with the views expressed in the Educational Materials.
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One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses is material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
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