Technical indicators of the market – good or bad
The term “Technical Indicator” appeared in the late 80’s and mid-90’s of the last century. This was due to the mass computerization of the trading processes on the exchange , the rapid development of communication networks and the development of programs for stock trading.
Prior to this, the main way to obtain information for trading stocks were periodicals such as the well-known “The Wall Street Journal.” At that time, few people were interested in charts, as such. Those few who actively used technical analysis in trading on the stock market drew them manually on millimeter paper using data on closing prices from public sources.
The appearance of a computer, programs for trading stocks and online trading has put a lot of “upside down” – it became possible to build charts automatically based on yesterday’s closing prices and intraday information.
At the initial stage, all the data on trading on the exchange went with a great delay, and it was not possible to see them in real time, besides, the bids of traders were carried out manually, all this created a very slow and smooth market with long trends and a large time reserve for decision making. Then the idea of momentum appeared – the construction of various indicators for the search for trends and entry points for trading on the stock exchange.
This led to the creation of two large groups of indicators:
- Trend, for example – Moving Average, Bollinger Bands, MACD;
- Oscillatory indicators, like – Stochastick, RSI, Momentum.
Of course, these are the most basic and “ancient indicators”. At present, there are several thousand of them, in addition there are author’s indicators, and their number grows literally every day.
All trend indicators come from the “Simple Moving Average”. For its calculation, the closing prices of a certain time period are taken, for example, for yesterday.
Say, the average price for the previous ten days. Further, when a new price arrives, the old one drops out of the row, and the new one starts to be taken into account. Thus, the envelope begins to appear on the chart, following the price with some delay. Usually, signals at the intersection of two or more moving averages of different periods, for example 200 and 50, are usually used to find the trend and the entry point. Currently, many traders use the Moving Average with a length of 200, trading it as one of the most important levels, since it shows the average price for the year.
Similarly, MACD works, which is the same two Moving Average in the form of a histogram, or Bollinger Bands, which is based on a 20-day moving average with volatility boundaries.
Markets have the property that the trend in the market lasts about 30% of the time, the rest of the time the market is “asleep”, that is, it is in the side channel between support and resistance, which is the most unfavorable in trading on the stock exchange. This condition is called a range or flat, many traders also call this time “saw” or “teeth”, which emphasizes the unfavorable for trading in general and online trading in particular.
To work in flat, there are oscillator indicators such as Stochastick, RSI, Momentum. They work roughly according to the same principle: closing prices are taken for a certain period and distorted according to a certain mathematical formula. Further, the distorted line of oscillators begins to oscillate between the overbought and resold zones, denoting the upper and lower boundary of the lateral channel (now practically all programs for stock trading involve the display of these and many other indicators). This makes them more efficient in flat (buying from the bottom, selling from the top) and useless on the trend.
As you can see, at the heart of any indicator there is always one indicator – the price (when calculating some indicators, volume is also taken into account), so they do not give any new information.
The most effective indicators are only on daily and even weekly charts, where the true prices of opening and closing price ranges, signaling the cardinal changes in the market situation; and where the lag of the indicators is not felt so much.
Inside the day, their testimonies are more chaotic (casual), it sharply reduces the quality of indicators and leads to an excessive number of false signals both in trading stocks and in trading with any other assets. This calls into question the advisability of using them on timeframes below the daily chart.
To use technical indicators or not in trading on a stock exchange is an individual matter. Most professionals do not use technical indicators in online trading, they rarely use 1-3 indicators, whose work is very well known and understood. We advise to avoid oscillator indicators and try to use only trend, for example, ordinary moving averages and best of all only on the daily chart, where their effectiveness is already proved by time.
Inside the day, it is better to use indicators of a different kind – based not on price, but on volume, such as the Volume indicator, which gives additional information and is not critical to the time interval, as it does not distort the information received.
It should also be remembered that all this will have the greatest effect only in combination with classical technical analysis. That is, the figures, levels, channels and other elements that signal the entry into the market of a large buyer or large seller, namely, the driving force of the market, the calculation of which is the main task when trading on the stock exchange.