Do Technical Indicators Work?
When I started trading, like any other beginner, I thought the indicators are the holy grail of trading. I was using a bunch of them in my charts and was paying more attention to these rather than on price and volume. Later, I learned that these indicators are doing more harm than good in my trading, and started paying more attention to price action
All the indicators are derivatives of price and volume data and these derivatives could be effective comparison tools. Where we need to select a trading vehicle from a probable list, some of these tools could be useful. If we are focusing on a single instrument like Nifty Futures these are worthless.
Many Indicators are lagging in nature. There are countless moving averages and these are all arrived at averaging the past values. I don’t find any reason to believe these levels to work. Of course some widely followed averages like 50SMA and 200SMA may attract some order flow not because of the magical nature but as a self fulfilling prophecy
Another set of indicators measure the rate of change or acceleration. These are called leading indicators. Traders look for the divergence of such indicators. The basic assumption is trend decelerate before reversal. This assumption is faulty and price move can accelerate further without market reversing. You will be told to get price action confirmation before trading such divergences. Why price action alone is not sufficient?
Some indicators like MACD combines both lagging and leading indicators. These are all secondary derivatives and fail to avoid the basic shortcomings of primary derivatives.
There are another set of indicators which are belief based. This includes Fibs, Gann, floor pivots and many other mystical variations. If you are using them, “Let your Beliefs Save You!”
Now a days Indicator Bashing has become very fashionable. These people claim they are trading pure price action. If you look closely you can see they are trying to trade some candle patterns without any respect for the location.
There are countless methods to trade the Markets profitably. You can save a lot of time and effort by applying a simple test. Look at the defined Market Structure, the framework within which price is supposed to move. Find out whether the Market is respecting these levels repeatedly and these levels are actionable. Throw it out, if it is not.