Monday, April 6, 2009

Self-Fulfilling Indicators

Check out Yngvai's newest post on dispelling indicator myths. He does a good job on explaining and dispelling Fibonnaci retracements.
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5 comments:

mvw said...

Pretty cool article, Ryan. I try to stay away from the arbritrary TA stuff like EW, and most fib numbers. Anything that can't explain the behaviors of buyers and sellers are worthless, imo.

The only fib number that mean anything to me is 50%, because if you got in on a trade, 50% of your capital win or lose is a decent level for people to start reacting.

The dirty secret about most popular indicators and patterns is that they all lead you to the same conclusion that can be garnered through price (usually).

I should be writing this on his blog, shouldnt I? K, copy and paste...

April 6, 2009 at 8:08 PM
ryan said...

Haha. Not that I mind hearing from you, but I was going to say, "I hope he doesn't think I wrote that article." Heh. But yeah, it really is a good article.

Also, I agree with you on the 50% retracement idea, as long as its from a high volume area (I suppose). I just think specific "magical" numbers are kinda misleading.

April 6, 2009 at 8:15 PM
Jules said...

Fib levels are just popular support and resistance levels. The more people use them, the more "magical" the numbers become. No difference from simple S & R lines. A pure tapereader once said that he doesn't even believe in S&R lines coz you can draw an infinite number of lines that you can call support and resistance. But of course that's only coz he hasn't spent time studying how to find the true S & R. His focus is on tapereading, and he is doing very well with his method. He doesn't need a chart. But that doesn't mean that a chart is useless. Many traders trade profitably with charts. Many others make millions without ever looking at a chart. I don't use a lot of indicators myself, because I'm not good at reading them - simply because I wasn't interested enough in the first to really study them. But I believe there are consistently profitable traders who can't trade without their oscillators and MAs and CCIs - you name it.
To put it simply, the tools we use are mostly for us to plan where and how we would get in and get out. As Fear and Greed Trader says "if the chart does this, I do this, if it does that, I do that" something like that. Apply this to support and resistance, it would be "if I have 2 closes above resistance, I'll buy, and if price comes back down and close twice, I'll bail" You get the drift. None of the tools will tell you the future. No support line is guaranteed to hold. So do we stop drawing them?
Just a thought :-)

April 9, 2009 at 10:43 AM
ryan said...

I like it Jules! =)

And I think what you said adds a ton to the discussion.


PS: I guess if it works for you, then don't stop because some guys on the net who can't figure it out say to! =D

April 11, 2009 at 7:14 AM
Jules said...

:-) To clarify, Ryan, I don't use fib for entry on the futures. I used to use it on the ER2 (now TF) to see if it was indeed a trending day. For ER2, it used to retrace by 38.2% on a strong trending day. It hardly retraced more than that. Anything more, it was a warning of a reversal.

But that's no longer the pattern on TF these days. What is still useful is the "seed". The range gives a fairly accurate projection of where a move will end. Let's say I noticed that for a seed that's less than 5 points, the move will exceed 423.6% - so when i work with a new seed that's about 5 points, I will find out where 423.6 ends - and if that happens to be a major support or resistance, I'll be more confident that the probability that the S/R will hold is high. If the move stops at 261.8 or 303 instead, I'll be prepared for a change in trend and sentiment, and start looking out for traps. A healthy trend usually does not retrace to below 100%. Once it does, even if it were to bounce back up, I'll lower my expectation in terms of targets and start looking out for setups in the opposite direction.

One can do all that with just candlestick patterns, and simple price actions, and confirmations before entry, sans fib, of course. Fib is useful (in giving you more edge) to the extent that you are familiar with how a particular instrument behaves at specific fib levels. Whenever there's a deviation, you'll be more alert to possible failure of pattern - and you can start considering adjusting your entry/exit/position sizing accordingly. It shouldn't change your strategy (for entry/exit/risk management)though, if it's not based on Fib in the first place.

Again, just my personal experience with fib. I find it less arbitrary than many indicators. :-)

Oh, and I absolutely hate market holidays too.

April 11, 2009 at 9:46 PM

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