Indicator vs price action

Why I ditched indicators for price action.

A good price action trader is like someone who is good with the sniper.

It was already a bad day. Fred’s business partner was unable to deliver. His supplies were delayed by the shipping company. There ship was experiencing some technical casualties.

His phone rang by 9:00pm He starred at his phone. It was an unknown number. He picked the call and stayed silent for some seconds. A voice then spoke out. Your 16 years old daughter Lucy is tied up alone in a room.  If you want to ever see her again come to “100% is a joke Street” alone with a bag containing 5 million dollars. If anything odd is noticed you will live to regret losing your only daughter..

Fred as an ex Mossad agent, good with guns and in martial arts, plans to ambush them and save his daughter.

He calls his old friend who is good with software hacking to be his partner in the mission. His friend scans the area to get some knowledge about the surrounding and how many bad guys there are.

Fred then walks up to his gun rack. He has the options of silencer guns or machine guns.

Now if you are Fred. What gun will you choose for this mission? Silencer guns or machine guns? If I was the person I will choose the silencer guns because it is the best option for the mission. It is neat and effective.

If he was to ambush with machine guns, it is noisy and messy. It will cause more complications. There is high risk of losing his daughter and that is a loss to him.

The machine gun is like trading with indicators while the silencer is like trading with price action. If you want to profit from the market. You will trade like a sniper.

Why you should ditch indicators for price action trading.

  • Indicators give false signals

When I started trading, as a newbie I thought indicators was the key to profiting from the market. I tried a lot of indicators but they were not giving positive results.

They gave false signals, for example: the relative index(RSI), stochastic oscillator, commodity channel index(CCI) etc. are all momentum indicators.

These indicators tell when a market is over-bought or over-sold. When it is over-bought it signals that is time to sell. When it is over-sold it signals it is time to buy. These various momentum indicators are independent of each other.

For the fact one of them is over-sold doesn’t mean others will be over-sold too. The MACD can be showing sell signal meanwhile the stochastic oscillator will be showing buy signal at the same time and moment.

So which will you choose? You see there is conflict of interest. A buy or sell is probably a wrong signal.

false signal.png

From the chart above if you had entered the buy signal. It would have resulted to a loss.

  • Indicators are confusing and not neat

I know some few people that tell me how they struggle in trading the financial markets. I ask them about how they analyze the market. They show me their chart and it looks like this.

confusing chart.png

From the chart above it is difficult to do proper analysis because the chart is messy. Too much of indicators is bad.

Below is a mobile screenshot from investing.com
The picture consists of popular indicators showing both buy and sell at the same time on Tiffany & Co (TIF). In this situation making a decision becomes difficult thereby leading to confusion.

  • Indicators are slow

Have you ever missed a flight? Trading with indicators is like missing your flight. You will need to pay extra money to enter the next flight and that is a loss from your pocket.

Look at the chart below a price action trader will join the momentum early meanwhile the indicator guy joins the upward momentum later after the moving average crossover. At times the momentum dies down early and you could miss the whole move.

slow.png

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