subject: A Complete Trading System Versus Technical Indicators [print this page] A Complete Trading System Versus Technical Indicators
There are literally dozens and dozens of predictive indicators on the Market today. Surf up trading indicators and you'll see them, all claiming to be the Holy Grail of trading. They vary in price from $50 to $1000, but each one basically functions the same way. They all promise to turn your trading platform into an ATM machine, where money just flows continuously.
The hard core truth israrely have trading indicators shown predictive value over a long period of time.
Technical indicators seek to predict the direction and magnitude of future equity price changes. But do we ever see a technical analysis writer show how or whether those technical stock indicators ultimately had predictive value with a large range of stocks across several market sectors?
We have all heard such phrases as "the trend is your friend" suggesting that stocks that are currently in an identifiable trend are likely to continue that trend rather than reverse. Many technical indicators attempt to identify the trend and alert the trader that they should enter in that direction. The problem is that by the time the technical indicator has identified the trend and sent its signal, too often that signal is at the tail end of the trend and does not result in trading success for the investor.
This is a fundamental problem with trading indicators and the Predictive Trading Model. After all, what is a prediction? Wikipedia describes a prediction as a statement about the way things will happen in the future, often, but not always, based on experience or knowledgeprediction is closely related to uncertainty. So if prediction is closely related to uncertainty, why would someone invest hundreds of dollars to buy uncertainty? Moreover, why would someone then put their life savings on the line, trading with that same uncertainty?
Too often traders believe that a trading indicator is a complete trading system. Nothing could be further from the truth. To be consistent, one must have a complete trading system with trading strategies, not just a couple of trading indicators.
The Market is extremely volatile, subject to environmental and political variables. An earthquake in Japan followed by a tsunami, a country defaults on its debts, or a dictator is overthrown, all of these external influences can limit the viability of a trading indicator. Again, as Wikipedia stated, prediction is not always based on knowledge. Since an indicator attempts to predict the future, it cannot anticipate an earthquake, tsunami or government overthrow.
It is important to develop an entire trading system with trading strategies designed to take into account changes in the environment.
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