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With so many indicators on the market, question arises how to select and organize them.
First most important point is what kind of indicator is that: lagging or leading.
Moving average crossover is a lagging indicator, based on physicality of the market. It triggers when emotion of the crowd already reached its heights. It creates the illusion of confirmation and safety, but in reality produces lousy to average results in most cases. That's true; code could be optimized to certain extent, but will never get perfect by definition. What I want to say, there is certain psychological make up built by those techniques in the industry. And those lousy trading habits are strong and often stand on the way of accepting new concepts.
Now if we take Hurst channel, it projects nearest future, instead of just reacting to the nearest past. So it is qualitatively different and requires different habits, different thinking - Trading ahead of the market not after it moves. That's what I arrived to. With Hurst Channel and other predictive techniques it becomes possible, because indication is based on a pure concept, not on a secondary physical trigger. Channel spots the hot area of the cycle, then smaller time frames and other projecting techniques are used to narrow the entry. So far I managed to narrow it to $0.5-1 on individual stocks. Most of the time within 50 cents. What I do, I make few price projections in a hot spot area within a $1 range and then watch 5 and 1 min chart momentums (MACD, BollingerB) to decide which one is going to play out. Sometimes it goes against me and I have to sweat, but not much. Usually it gets resolved within an hour and I smile for the rest of the time. I also use lagging and confirming indicators to decide if I want to stay longer and if position is strong or is it better to reenter at a better price or time. But having the advantage of catching a top or a bottom reduces losses and sweating periods. Most trading books don’t recommend trading tops and bottoms, but they also don’t carry sufficient knowledge of good planning.
If you compare it to a break out entry, breakouts are tempting; they look like everything goes in your favor. Wrong, most of the time breakouts correct itself and go against you. Distance between Entry and stop point is huge. No room for break even. Sweating time is bigger. It really sucks.
So, there is psychology involved:
1.Well-planned entries are scarier at first look (require courage), but better in terms of return and general well being after.
2.Break out (confirmed entries) are more tempting and appealing, but less favorable as later appears.
So what I refer as "courage" is courage based on intelligence of recognizing phenomena of trading psychology, that our senses aren’t perfect, they can delude and put us on a wrong path.
Conclusion: it is better to use good quality conceptual - predictive indicators as primary; instead of lagging even they are of the best quality. Lagging could still be used for trailing stop purposes and target confirmation, but not as trading triggers on its own.
That's my trading philosophy if you wish - projecting into unknown. Acting first, rather then reacting to someone. That's what trading is about and should be treated as such.
Hope this explains you few things.
Greg.
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