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Hi Gabe and anyone else who is into indicators...
Before you get too excited about 'understanding' indicators, let us be quite
clear that all indicators lag price. All indicators lag price. Write that
on your wall!
If you day trade, you don't need indicators because the price action tells
you precisely what is going on. There are various tools (not indicators)
which can help you establish the position of the market at a precise moment
that the price action is telling you what it is doing. It is the various
factors of support and resistance that you assess in relation to price
action, which tells you what to do. In short, it is called reading the
tape.
If you position trade and use indicators, then you are using a tool that
lags the market, therefore, you have to have a bank account that will
accommodate the draw downs you have to suffer. This is not to say the
indicators don't give you the indication you are seeking, but it is going to
cost you dearly on many occasions. It will give you super returns, by the
same token. The BUT, is that you have to have a bank account of decent, if
not obscene, amount to withstand the drawdowns.
For example, the day trader in the Bonds over the last several days has seen
excellent buying days on the way up and excellent selling days on the way
down. He or she had a good night's sleep prior to the opening for another
good day, each day. The position trader who started long, may have lost at
least half the money on the way down, while the indicator started to
indicate a change in trend, if indeed, it did that. If the indicator is
saying 'hold on' this is just a retracement, then he needs a goodly amount
of loot - and belief!
Personally, I'd rather rely on reading the tape in the short term than rely
on the lagging indicators for a position in the long term. Today, like most
days, was predictable on the bonds, because all the factors were there to
read the tape. But tomorrow? I gotta wait for tomorrow to become Today,
then I'll know...
Best of luck
Bill Eykyn
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