I love this part of a recent email conversation with a reader:

  • “Why do you hate indicators so much? You can’t beat the simplicity of an MA crossover for holding the trend.”

Haha. “Hate” is a bit severe. I honestly don’t hate them at all. I use some indicators. The YTC Scalper lower timeframe template uses a channel indicator.

My concern is simply that most people don’t understand the indicators they’re using. And will naively use them in conditions for which they’re not designed.

MA crossovers for example…

In a market with stable, long persistent trends, almost any method of trend identification will work. And will work quite well. It really doesn’t matter what method you use, whether a PA based swing high/low trend structure as I prefer, or any form of trend indicator such as MA crossover. It has potential to trigger you into the trade. And to hold the trend through till its conclusion.

But here’s the problem with the way most traders use an MA crossover.

They use it to provide a binary outcome – uptrend or downtrend. But the market is not binary. There are MANY sequences of price movement which do NOT trend nicely.

<image: Trends can also be sideways>

I have no problem at all with you deciding to use an MA crossover to signal a trend. Just be sure to include rules to quickly identify a sideways trend. And to adapt to this new and potentially unfavourable environment.

But if you’re going to have to do that anyway, why not consider a swing high/low method which more easily identifies this for you.

Let’s take away the moving averages.

<image: Trends can also be sideways>

<image: Trends can also be sideways>

<image: Trends can also be sideways>

<image: Trends can also be sideways>

<image: Trends can also be sideways>

<image: Trends can also be sideways>

<image: Trends can also be sideways>

<image: Trends can also be sideways>

Can similar be achieved with an MA crossover?

Absolutely.

<image: Trends can also be sideways>

<image: Trends can also be sideways>

So yes… you’re probably right that you can’t beat the simplicity of an MA crossover for holding the trend.

But unfortunately the market is not always trending.

Indicators are fine. Just make sure you’re aware of their limitations and make plans to recognise and adapt, when conditions become unfavourable.

Or implement a swing high/low system for trend identification that can identify uptrend, downtrend AND sideways trend states.

Happy trading,

Lance Beggs

 


 

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8 Comments

  1. I endeavour one day to be able to read charts with this level of fluidity as you do. I strongly believe your methodology of reading charts ( close position/ close comparison) is undoubtedly up there with the very best. I am using it and it is beginning to pay dividends
    Again always adding value.

    Thanks Lance

    1. Thanks George. It’s a work in progress. Constant and never-ending improvement. Even for me.
      I wish you all the best of luck for your ongoing success.
      Lance.

  2. What is a Gold mine?

    A hole in the ground with a liar at the top!

    Let’s call him “indicator” 😀

    1. There is a significant amount of time required to produce video education. And I don’t currently have that time available. Sorry. To busy actually trading.

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