The question to use or not technical indicators for trade analysis and the way it is useful is as old as financial markets. When this question arises this means a kind of trader maturity or by other words the trader has come upon his own vision of the market. There are several close-to-market industries, which turned out to be rather profitable. Development of trading robots and automated trading systems, based on technical indicators, as well as trading signals may serve as a good example of such business. Unfortunately, many novice traders become involved in the marketing sales of trading web sites, software developers, and self-proclaimed market gurus.
However, the problem in the technical indicators is that indicators data is a kind of a distorted noise of the market prices. The trader learns to use indicators, to identify patterns, and finally neglects actual price data. In other words, they attempt to analyze not the prices themselves, but variation of the price data. If a trader relies on indicator data in his trading analysis, he gets a distorted view of what the market is doing. The more indicators in the total volume of analysis, the more distorted the picture the trader sees.
As you know, technical indicators are distinguished into two different classes. Technical indicators can be leading or lagging. Lagging indicators are designed to help a trader to make money in trending market. This class includes such well-known indicators as MACD or MOVING AVERAGE. However, they are named «lagging» not in vain, as they get late with the signal to enter the market. They provide the signal when the market has already gone and develops the trend with might and main. The only thing where they can help is to determine the presence or absence of a trend. In the conditions of a sideway market or prolonged consolidation, trading with help of such indicators, or even worse with the help of robots based on these indicators, will very quickly kill the account balance.
Leading indicators are designed to help the trader determine the tops and bottoms of the market. These ones are the so-called oscillators, among them Stochastic, RSI and others. In the trend market, they are account killers. If the market is in an upward trend, the oscillator will show that the market is overbought, when in fact it leaves the local consolidation and is going to break up thorough upward impulse. In the downtrend, the opposite will happen.
Thus, there are two opposite classes of technical indicators. Novice traders learn the market and learn how to trade by these tools. Understanding the different character of these indicators, newbies try to combine these instruments, turning the price chart into something chaotic, not analyzable, getting a bunch of confusion and disorder at the output. This leads to emotional and mental stress, guessing, overtrading and, as a consequence, loss of the account balance.
If you tell a trader, trading based on technical indicators, that all what he needs to do is remove ALL of these indicators from the chart, he will probably not believe you. Indeed, all what needs to do is remove these indicators - distortions from the chart, and finally get a chance to see the price clear. The price itself will tell what the market is preparing for and how it feels. It is enough to identify the main and local levels, determine the trend and its strength, and learn how to read candlestick analysis, and the trading goes to a new level. This is the level at which professionals trade.
This system of market analysis is called a price action. This is what we will talk about in one of our next articles.