Confessions Of An Indicator Addict

Hi, my name’s Rob and I’m an Indicator Addict.

I confess, I really like them. Or, should I say, I used to really like them. Here’s my story:

I happen to love riding motorcycles.  When I’m on my scoot, my mind is relaxed and focused.  I’m not thinking about bills, or politics or what to have for lunch.  I am completely in the moment, and have an acute awareness of what I see and hear.  Thanks to this focus, if a “cager” (someone in a car) pulls out in front of me, I don’t have to think about what to do.  I’m not surprised by it and I can react - instantly.  This focus has helped me to survive. 

In contrast, I have sat in front of my trading screens agonizing over a trade.  “Should I cover now or give it some more room?  Better check the advance/decline ratio.  What are TICKs doing?  Omigosh, stochastics have just crossed up, so maybe I should exit and reverse…”  I would sit there paralyzed, trying to process all the information and interpreting what each indicator might be telling me.  All that mental activity… with no resultant action. 

Why the difference?  Well, my motorcycle doesn’t have a radio, I can’t juggle a cup of coffee or use a cell phone while riding it - and it’s operation doesn’t require that I watch a half-dozen multicolored indicators jumping this way and that in front of me while I ride.  There’s nothing to draw my attention away from what’s important - the road in front of me.  In contrast, I have 3 trading screens, each with two charts.  Until recently, I had so much “stuff” on each chart it was difficult to find the price bars (the road in front of me).  There was too much attention-grabbing visual noise to process.  I was… an indicator addict.

We’re a gadget-based, quick-fix society.  Many of us think that if we try the “Volume-Weighted  Left-Lateral Stochastic/MACD Whoppicator”, the sky will open up and our problems will drop away.  We refuse to believe it will never happen.   It’s a refusal to face the fact that trading is an inexact pursuit, that there is no perfect indicator.  We mistakenly believe that perfect entries and perfect exits are possible… if only we have “one more” indicator.  Even the search process became addictive for me.

Do you think that all these successful traders who keep preaching “money management” and “price action” are just pulling our legs?  For many years, I believed that the discipline of good money management was for “other people”, who, unlike me, were not on the verge of finding the “perfect system”.  Thanks to a lot of luck, I survived in this game long enough to learn otherwise. 

I finally realized it was time to change the paradigm.  I needed to get rid of the clutter and focus on what was important. 

I began to wonder if there was anything that had survived on my charts all these years.  What had I not discarded in favor of the next new thing?  The only things that have remained with me through thick and thin are price bars and moving averages.  Price bars tell you where price is, and what it’s doing.  Moving averages tell you where price has been.  What else is necessary?

Indicators will not make us good traders.  One of the best traders in the TradingMarkets.com chatroom allegedly uses nothing but candlesticks on his charts.  He uses no indicators. 

I wondered, “Could I do that?  Could I go that far?"  I began asking questions.  “If an indicator turns up, is it because it has magical forecasting ability?”  No, it’s because price turned up.  “If an indicator is about to cross zero, is there a guarantee that it will cross zero on the next bar?”  Of course not:  It will only do so if price keeps heading in the same direction.  So, why was I paying homage to indicators instead of to the real deal? 

Over a period of weeks, I looked critically at each indicator on my charts.  As I did so, I began to genuinely understand price action.  At the same time, my charts became less cluttered.

An example:  for years, I was fond of a 7/3/3 stochastic, which I used to identify retracements.  One day, I noticed that almost every time my trusty stochastic was inclined upward in a downtrend, there also happened to be a price bar with a higher low and a higher high.  Well duh!  My old friend, the 7/3/3, is no longer on my charts.

The CCI indicator has a loyal following.  What is CCI?  It measures the distance from price to a moving average.  Nothing more.  The “zero line reject” trade of one infamous CCI room represents price approaching a moving average and then moving away.  Did I really need an indicator to tell me that?  Gone.

If price is approaching a resistance level that has been tested repeatedly but not surpassed, does it really matter that a stochastic indicator is trending upward?  If price has just made a lower high in an uptrend, does one really need an oscillator divergence to warn that trend may be changing? 

I know I’m not the only one with this addiction.  I’ve seen your charts, so don’t deny it.  The first step is admitting you have a problem.  How did we get this way?  Besides believing that there is a “perfect indicator”, we want our indicators to console us and tell us that, “Everything will be OK.”   But, you know what?  It's never OK.  It's never perfect. 

Giving up an addiction is not easy.  I admit it was a bit scary for me to get rid of those indicators.  It was a leap of faith to look at a relatively bare chart and trust that I would see what I needed to see.  I reminded myself of the thousands of hours of screen time I have invested in learning this profession and I knew that it MUST have taught me the ability to see without indicators.  Time builds intuition  - but unless we give ourselves the opportunity to use it, and trust it in lieu of indicators, how can we ever know?  

Too much visual noise can lead to  "analysis paralysis".  Avoid this dreaded malady.  Consider removing a few of those pretty colored lines from your charts.  React to what price is doing, rather than thinking about whether an indicator has crossed above zero, or below oversold, or is diverging with price.  Trust that you know what price is doing by watching price action and a few moving averages, and trust you will respond appropriately.  The results may surprise you.

Rob Chapman
(TradersWire: robbo)