# Tag Archives: Indicators

## Identifying SMA Turn Points Ahead of Time

I was recently discussing EMA vs SMA with a trader who uses moving averages as a component of his analysis.  (Note: EMA = exponential moving average; SMA = simple moving average)

Specifically, one part of his methodology requires the identification of a turn of a short-term average against the trend to indicate a weakening of that current price swing.

I suggested that my preference in this case would be an SMA simply because the easier mathematics allows us to see in advance exactly at which price level the current candle would need to close at or beyond, in order to turn the average line.

He wasn't aware of this concept, so it's quite likely many others aren't as well. So let me share the idea here. I'm all about "keeping your mind ahead of the current price" and this technique allows you to do exactly that. You'll know ahead of time, exactly where price needs to go in order to change the SMA slope.

It's commonly believed that EMA's are superior to SMA's, simply because they're more responsive to price change and will adapt to movement quicker. While there is some validity to this, really SMA and EMA and all other indicators are just a tool. You really need to ask what you're trying to indicate. Then seek out the tool that best provides you with a solution.

Anyway… here's the thing with EMA vs SMA as it relates to "identifying in advance the point at which the slope will change":

And it takes about a second to know this. With no mathematics at all.

Let's look now just at the SMA as we move forward bar by bar.

## 6.18 Reasons Why Fibonacci Is An Illusion

Some people are not going to like this article. That’s fine though. We may just have to agree to disagree in the end, because this is an argument that has been going on forever on trading forums without ever finding any common ground.

Of course… my side of the argument is the right one… but some people just don’t seem able to see that.  🙂

I’m talking of course about Fibonacci levels, and their use in trading.

This discussion has come about as a result of a recent email by a YTC Newsletter reader, as follows:

Excerpt from Email:

Hi Lance,

Just a chart of today’s price action in EUR/USD.

From this H1 chart, we can see how well trend lines works, also that 61.8% retracements works and that S/R in charts works. Three good reasons to take this trade in my opinion, with very low risk and great rewards.

Since London closed high up and the Asian session traded far lower, to the traders in London this might just be seen as a large gap for them, just my thought on the subject and an idea for exit target.

How come you do not find trend lines and Fibonacci levels useful in your trading, if I understand you correctly?

I do not know of any tools that are so exact as trend lines and second are Fib-levels, chart S/R work also very well and is usually found close to major Fib-levels.

Chart Attachment:

Response:

Let’s consider fibonacci levels… why don’t I believe in fibonacci levels as having some predictive ability to identify turning points?

Reason 1:

## My Favorite Indicator

Here’s a recent question I received…

“If you had to use one indicator, and one only, which would it be?”

Simple… no thought required…

Keltner Channels.

Parameters set to (10,1.5) as my default, varying to (10,2) or (10,2.5) if necessary to ensure a nice snug fit around the price.

You’ll find some basic info here: http://en.wikipedia.org/wiki/Keltner_channel, but the best way to see them is to place them on your chart.

The original use of Keltner Channels as part of a trading strategy, so the story goes, was to buy when price closed above the upper channel line (indicating an uptrend) and to sell when price broke below the lower channel (indicating a downtrend).

I don’t subscribe to that theory.

Instead, I prefer to use a reversion to the mean concept. Depending on the context of the market, I’ll be aiming to buy near the lower band looking for a bounce back upwards, or sell near the upper band looking for prices to fall.

Like all indicators though, please remember it’s a tool. It’s not a complete system by itself.

Market context and price action analysis will tell you the market bias. Your job is to then take trades in the direction of that bias. Keltner channels can assist at this point.

In an uptrending environment, trade opportunity is found in the vicinity of pullbacks to the lower channel. In a downtrending environment, opportunity is found in pullbacks to the upper channel. And in a ranging environment, both may provide opportunity. Some examples follow below; remembering that it’s never as easy as it looks in hindsight.

Nothing magic – standard envelope or channel theory really. But if you’re not familiar with Keltner Channels then have a look at them and see if they have a place in your indicator toolbox.

Lance Beggs

## A Common Indicator Mistake

I love it when I read forum entries from people suggesting trading strategies along the lines of:

• Enter long when the RSI(14) is above 50, the stochastic (14,5,3) has crossed positive, and the Williams %R(14) is rising from the oversold area
• Enter short when the RSI(14) is below 50, the stochastic (14,5,3) has crossed negative, and the Williams %R(14) is falling from the overbought area

(Disclaimer: I just made up that strategy, so don’t trade it without testing it first – the fact is though – I seriously doubt it works)

Look, there are many problems with calling something like this a strategy, but the one I want to discuss today is simply that each of these indicators belongs to the same class of indicator. The RSI, the stochastic and the Williams %R are all oscillators.

An oscillator is a momentum based indicator that moves above and below a horizontal axis representing a position of neutral momentum.

Now each of these three oscillators measures momentum slightly differently. RSI measures it through comparing the magnitude of higher closes to lower closes over a set period of price bars. The stochastic measures it showing where the current close fits relative to a high/low range over a set period of price bars. The Williams %R works on the same concept as the stochastic, showing the relationship between the current close and the high/low range set over a period of price bars, however it does so through a different formula.

Basically, all are measuring the same thing. Quite likely, you’ve added some extra complexity to your strategy that serves no useful purpose at all.

Is there ever a need for more than one oscillator? Possibly, yes. It depends on what you’re trying to achieve. You might use one for indicating oversold or overbought price areas, and a different one for indicating increasing or decreasing momentum. You might even use one indicator twice, with different parameters, to represent momentum over both a shorter and longer time period. In this case, it’s fine.

However, I suspect many traders when developing their trading approach don’t really think about it to this degree. I suspect most just slap an indicator on their chart for no other reason than their platform provides it, and then look through the price history to see whether it shows potential for profits.

In this case, they can probably benefit from removing any redundancy.

So, what indicator classes are there? With some exceptions, the majority will fit within one of these four classes:

• Trend indicators, such as moving averages, directional movement or trendlines.
• Volatility indicators, such as bollinger bands, average true range or standard deviation.
• Oscillators such as RSI, stochastics and Williams %R.
• Volume / Market Strength indicators, such as volume, on balance volume or money flow index.

Generally you shouldn’t need more than one indicator to determine trend, one to determine volatility, one to determine momentum, and one to measure volume. In many cases, through a study of price action, you can even eliminate those single indicators and determine trend, momentum and volatility through price alone. Of course, that’s not for all people.

What I encourage you to do is to look carefully at the indicators you’re using. Do you have more than one indicator from any of the indicator classes? If so, is there a valid reason for it, or is it simply redundancy that has slipped unnoticed into your trading strategy? More often than not, I’d suggest your strategy could benefit from removal of that extra redundancy. Trading is one business where ‘simple really is best’.