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At 11:09 AM -0400 4/14/99, stuart wrote:
>Thank you for your reply. You are correct that there is no easy way to
>study all of the indicators available commercially. I have rewritten my
>inquiry to the group to see if there can be a generalized way that the
>users can list their approval or lack of to the various vendors. For
>instance, if someone has purchased indicators from Mr. Jurik and they like
>them, they could just say that Jurik's indicators have added value to
>their trading decisions. If someone has researched many of the
>commercially available indicators, and a thorough response would be too
>demanding to be typed to the list, I would be glad to call them at my
>expense if they would have the time to respond.
There has been much discussion on all the lists in the past about the value of indicators. It is a favorite subject of mine so I will try to respond and throw in a bit of additional "wisdom" I have accumulated. This has turned out to be more like an "essay" than a "reply", for which I apologize, but as others have noted, your question is not simple to answer.
When I first started out with a charting package that could plot indicators, I thought I had "died and gone to heaven". The common indicators, such as RSI, MACD, etc., seemed to be signalling market turns very accurately on the historical charts. Was I ever going to make money! But when I tried to use them to trade, they didn't seem to work. By the time they signalled a turn, it was already too late. And there were many false signals where the price didn't do what it was supposed to do.
I figured out that the brain is very adaptive at seeing what it wants to see and that when viewing historical data with the price together with the indicator, your brain seems to see the signals that are correct and not see the ones that are incorrect. But in real trading the false signals cause you to lose money.
So I got more indicators and used several to "confirm" each other's signals. Then, I finally figured out that with enough indicators, I could always find several to confirm whatever I really wanted to do. Needless to say, this didn't work either.
So I thought I needed better indicators and assumed that the ones you have to pay a lot of money for were better than the common ones that come for free. I think this stage is called "Indicatoritis". Some of the commercial versions of indicators seemed to have fewer false signals. As I recall, I liked some of the ones from the Bressert Group and from Ehlers. I am sure there are others good ones as well. But since these are usually locked, I couldn't understand how they worked so had a hard time developing confidence in them.
About then I got the idea that it wasn't just the indicators that I needed but also the "method" for how to use the indicators. By happy coincidence, this was also for sale!
After trying a few of these, I was still getting mixed results so I decided I needed to study books on trading. I bought and read a lot of them, probably over a hundred. Some are very useful in teaching you the fundamentals but I did not discover any foolproof way to make lots of money from reading books. Beside which, looking at dozens of indicators, especially in real time, is very hard work. Your brain gets very tired.
Fortunately, I seemed to have skipped the stage where you decide to buy commercial trading systems for a few thousand dollars - you know, the ones that are "almost" guaranteed to make you millions. I think I figured out that no one in their right mind would sell you a printing press to print money for a few thousand dollars. Obviously, it would be a lot easier to just print the money themselves if it really worked.
There are a few sources for "interesting" trading systems that cost a few hundreds of dollars. Those from Chuck LeBeau and the Omega System Trading and Development Club come to mind. These are useful in learning EasyLanguage and for showing you potentially useful techniques but there is no "holy grail" for sale at those prices (or at any price probably).
There is also the problem that everyone on these lists is partially competing with each other to make higher-than-normal returns. The earnings of the S&P 500 stocks is only increasing at about 6% per year so if I average more than 6% long term, someone else must be averaging less. (I know prices have been increasing faster than that for many years and that "it is different this time" but I remain skeptical.) With futures, it is a zero-sum game.
Now fortunately, the investment advisors all tell the public to just "buy and hold" and all will be OK after 20 or 30 years. This gives us "milkers" a few tens of million "milkees" to take our excess returns from. But people on these lists are not going to tell hundreds or thousands of people the secrets they have discovered. The other problem is that most things that work are due to short-term distortions that aren't widely recognized. And if they get published or widely disseminated, they stop working, by definition. So do not expect anybody on thse lists to give you their secrets. Not only are good techniques nearly priceless, but letting them leak out often makes them stop working.
I finally evolved to developing my own trading systems and this has worked pretty well. It is far less work than watching indicators and if you don't fool yourself, you can back-test how they would have done in the past to give you the confidence you need to trade them in the future.
But, back to indicators, I now use them in a different way. To build a trading system, you need to find something that happened in the recent past that correlates fairly well with what the price is going to do in the future. This is fundamental. Without it, this is all just gambling. So I use indicators to search for characteristics that might be tradable.
Examples might include:
- Tops seem to occur about every 15 bars
- Prices tend to move up after a "V" shaped bottom
- Prices seem to increase when they cross over the 50-day moving average
- Prices tend to bounce off of "support and resistance" lines
- The floor/specialist tends to run stops before a change in direction.
You need to search for these in historical data and indicators are very useful in locating them.
Then, once you spot some characteristic that you think might be tradable, you need to test how consistent it is in the historical data; how reliably does it signal a price move. This is usually pretty easy after the fact.
If it seems to be pretty consistent, you then need to find a way to locate the characteristic as it is happening. I have found that the traditional indicators are basically useless for this. By the time they issue a signal, the thing you are looking for has passed. This is because to look smooth enough to interpret by eye, indicators need to use a lot of filtering which introduces lag.
I almost always end up working directly with the price to find the characteristic I am looking for in real time. I often use digital filters to spot the event well before it becomes apparent to a common indicator, (quite possibly because on my training as an electrical engineer.) A simple example of such a digital filter was a trading system published by Bob Brickey about two years ago (code slightly simplified by me):
------
{ rpbTinyNN System - Last Modified 3-13-97 }
vars: Sum(0), NN(0);
Sum =
+ .1904762 * Close[5]
+ .047619 * Close[4]
- .0952381 * Close[3]
- .40476197 * Close[2]
- .0476191 * Close[1]
+ .3095237 * Close;
NN = 1 / (1 + ExpValue( -Sum )) - .5;
if NN > 0 then
Buy at Close
else if NN < 0 then
Sell at Close;
-----
It is not very apparent to a person what this does but a computer has no problems trading it.
Often I use some of the techniques that form the basis of the popular indicators. For example, The Stochastic indicator is based upon the "discovery" that the position of the closing price in a price bar tends to signal a change in direction. It is useful to understand this so it is worthwhile knowing why various indicators work. But rather than waiting for the filtered lines of the Stochastic indicator to start moving, I would design some computer technique to locate this characteristic directly.
This is not to say my way is the only way. Different people use different techniques to develop trading systems. I happened to like such so called "mechanical" trading systems that do all the thinking for me. I find that I cannot objectively trade very well by looking at charts and indicators. But there are many "discretionary traders" who are very good at it. In fact, I suspect that the best traders are discretionary traders. Their mind has learned to handle far more complicated cases than a computer program ever can.
Finally, you asked about tools such as those offered by Mark Jurik and others. These are not indicators in the usual sense. (I recall that he does include a few simple indicators to illustrate the use of his tools.) I have not seen them all but know that they are based upon fairly sophisticated mathematics and have a good reputation among those who understand how to use them. But just as a Stradivarius would sound pretty bad in my hands, sophisticated tools only work if you know how to use them. He certainly gives examples to help you learn but these are just "components" from which you can construct your indicators and systems. At one time programmers had to write from scratch all of the code they used. But today, there are many vendors of high quality software components that you can buy for very reasonable prices and that are usually much better than you could write yourself.
In summary:
- I have not found indicators particularly useful in trading but
I know many discretionary traders who do find them useful.
- I use them to try and identify tradable characteristics of markets
on historical data. In this application, the lag inherent in such
indicators doesn't matter.
- I also think everyone should learn how and why the various popular
indicators work since they often use techniques that may turn
out to be useful in developing your own trading system.
- Proprietary versions of the indicators do seem to be better.
Perhaps, when coupled with the methodology promoted by their
suppliers, they can be useful. I cannot really say. Since they are
usually locked, I cannot see how and why they work so tend not to
have a lot of confidence in them.
- But for developing trading systems, I almost never use them since
they tend to be too slow.
- But there are very good components, user functions, etc., such as
the Jurik tools, that are capable of producing better results if
you take the time to learn how to use them properly.
When I see some trading system that says something like:
if Slow D crosses over 17 and RSI goes below 43 then increases back
above 87 two times then buy...
my eyes glaze over since I know the person that wrote it hasn't the foggiest idea what it will do, that those numbers came from lots of optimization runs on past history, and that if that system makes money, it will only be by chance.
Sorry this is so long - I got carried away. I hope you find it useful.
Bob Fulks
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