Re: Technical Indicators Due they Assist ?
Hi asish,
Here is my collection of one such knowledge from the net. Written by Ryan Jones.
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Over the last few years, my trading friends have seen very little
information from me along the lines of various technical indicators and
oscillators. No doubt, there is more than enough commentary on the
subject. However, there is good reason why I do not spend a great deal of
time focusing on them.
I'll never forget reading a pretty basic book on technical analysis
written by a fairly well known author. The purpose of the book was to
simply introduce a number of popular technical indicators and the author's
favorite use of them. It was pretty boring stuff for the most part and
stopped reading through it after the first chapter. However, I did
skim a few chapters and began to notice a very odd pattern within the
book.
There was a chapter dedicated to the use of stochastics and then
another chapter dedicated to the use of another similar indicator. The main
difference was that the stochastics were based on looking at 14 bars
while the other indicator was based on looking at 7 bars. Outside of
that one factor, the two indicators are almost exactly the same thing.
Now, before I get to the really odd part about this, I want to point
out that most technical indicators are virtually the same thing. For the
most part, technical indicators are, in some way shape form or fashion,
showing you where prices are compared to where they have been. I'll
get to this in a second.
Nonetheless, despite the extreme similarity in the two indicators being
discussed in the book, the author provides his favorite use of
stochastics. Then, in the second indicator, he provided his favorite use of
that as well... except it was almost exactly the opposite of how he used
stochastics!
It seems to me, had this author known how similar the two indicators
were, he would not have stated that his favorite use of them was exactly
the opposite. But that drives home a problem that I have seen with
many traders. There is a misunderstanding of exactly what technical
indicators are doing. One of the best ways to explain this is to explain
what technical indicators are NOT doing.
95% (or more, there are exceptions, such as volume) of all technical
indicators are NOT giving you any information that is not already
available from the chart action itself. In other words, technical indicators
are NOT giving you any new information whatsoever. Technical
indicators are simply focusing on one aspect of chart information that is
already their. They simply make it easier to see a certain characteristic of
market action that may not otherwise be quite as obvious. That is it.
And, a majority of the time, the focus, or the aspect that is being
made more obvious is where the current price is compared to where it has
been in the past.
For example, in a nutshell, stochastics are simply showing where the
current price is compared to the 14 day range on a percentage basis. If
the range is 100 and the price is in the upper 10% of that range, the
stochastics are going to show a percentage of 90% or more. There are
various things that are added to this, such as taking a 3-day range of
this level instead of the raw and exact number itself, but you get the
idea of what it is focusing on.
Now, is this information anything that is not seen from the chart
itself? Of course not. It is simply not as obvious to the eye, and that is
the benefit of the indictor.
One thing is for sure though, technical indicators tell what is and
what has been, but not what is to come. There is nothing magical about
them, there is nothing new that is provided through them. So be very
careful in how much emphasis you put on them in your trading.
And that is the Truth About Trading.
Sincerely,
Ryan Jones
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Regards
R. S. Iyer