Confessions Of An Indicator Addict

• April 22, 2005
• Rob Chapman

Hi, my
name’s Rob and I’m an Indicator Addict.

I confess, I really like
them. Or, should I say, I used to really like them. Here’s my story:

I happen to love riding
motorcycles.  When I’m on my scoot, my mind is relaxed and focused.  I’m not
thinking about bills, or politics or what to have for lunch.  I am completely in
the moment, and have an acute awareness of what I see and hear.  Thanks to this
focus, if a “cager” (someone in a car) pulls out in front of me, I don’t have to
think about what to do.  I’m not surprised by it and I can react –
instantly.  This focus has helped me to survive. 

In contrast, I have sat
in front of my trading screens agonizing over a trade.  “Should I cover now or
give it some more room?  Better check the advance/decline ratio.  What are TICKs
doing?  Omigosh, stochastics have just crossed up, so maybe I should exit and
reverse…”  I would sit there paralyzed, trying to process all the information
and interpreting what each indicator might be telling me.  All that mental
activity… with no resultant action. 

Why the difference? 
Well, my motorcycle doesn’t have a radio, I can’t juggle a cup of coffee or use
a cell phone while riding it – and it’s operation doesn’t require that I watch a
half-dozen multicolored indicators jumping this way and that in front of me
while I ride.  There’s nothing to draw my attention away from what’s important –
the road in front of me.  In contrast, I have 3 trading screens, each with two
charts.  Until recently, I had so much “stuff” on each chart it was difficult to
find the price bars (the road in front of me).  There was too much
attention-grabbing visual noise to process.  I was… an indicator addict.

We’re a gadget-based,
quick-fix society.  Many of us think that if we try the “Volume-Weighted 
Left-Lateral Stochastic/MACD Whoppicator”, the sky will open up and our problems
will drop away.  We refuse to believe it will never happen.   It’s a refusal to
face the fact that trading is an inexact pursuit, that there is no perfect
indicator.  We mistakenly believe that perfect entries and perfect exits are
possible… if only we have “one more” indicator.  Even the search process became
addictive for me.

Do you think that all
these successful traders who keep preaching “money management” and “price
action” are just pulling our legs?  For many years, I believed that the
discipline of good money management was for “other people”, who, unlike me, were
not on the verge of finding the “perfect system”.  Thanks to a lot of
luck, I survived in this game long enough to learn otherwise. 

I finally realized it was
time to change the paradigm.  I needed to get rid of the clutter and focus on
what was important. 

I began to wonder if
there was anything that had survived on my charts all these years.  What had I
not discarded in favor of the next new thing?  The only things that have
remained with me through thick and thin are price bars and moving
averages.  Price bars tell you where price is, and what it’s doing.  Moving
averages tell you where price has been.  What else is necessary?

Indicators will not make
us good traders.  One of the best traders in the TradingMarkets.com chatroom
allegedly uses nothing but candlesticks on his charts.  He uses no indicators. 

I wondered, “Could I do
that?  Could I go that far?”  I began asking questions.  “If an indicator turns
up, is it because it has magical forecasting ability?”  No, it’s because price
turned up.  “If an indicator is about to cross zero, is there a guarantee that
it will cross zero on the next bar?”  Of course not:  It will only do so if
price keeps heading in the same direction.  So, why was I paying homage to
indicators instead of to the real deal? 

Over a period of weeks, I
looked critically at each indicator on my charts.  As I did so, I began to
genuinely understand price action.  At the same time, my charts became less
cluttered.

An example:  for years, I
was fond of a 7/3/3 stochastic, which I used to identify retracements.  One day,
I noticed that almost every time my trusty stochastic was inclined upward in a
downtrend, there also happened to be a price bar with a higher low and a higher
high.  Well duh!  My old friend, the 7/3/3, is no longer on my charts.

The CCI indicator has a
loyal following.  What is CCI?  It measures the distance from price to a moving
average.  Nothing more.  The “zero line reject” trade of one infamous CCI room
represents price approaching a moving average and then moving away.  Did I
really need an indicator to tell me that?  Gone.

If price is approaching a
resistance level that has been tested repeatedly but not surpassed, does it
really matter that a stochastic indicator is trending upward?  If price has just
made a lower high in an uptrend, does one really need an oscillator divergence
to warn that trend may be changing? 

I know I’m not the only
one with this addiction.  I’ve seen your charts, so don’t deny it.  The first
step is admitting you have a problem.  How did we get this way?  Besides
believing that there is a “perfect indicator”, we want our indicators to
console us and tell us that, “Everything will be OK.”   But, you know what? 
It’s never OK.  It’s never perfect. 

Giving up an addiction is
not easy.  I admit it was a bit scary for me to get rid of those indicators.  It
was a leap of faith to look at a relatively bare chart and trust that I would
see what I needed to see.  I reminded myself of the thousands of hours of screen
time I have invested in learning this profession and I knew that it MUST have
taught me the ability to see without indicators.  Time builds intuition  – but
unless we give ourselves the opportunity to use it, and trust it in lieu of
indicators, how can we ever know?  

Too much visual noise can
lead to  “analysis paralysis“.  Avoid this dreaded malady.  Consider
removing a few of those pretty colored lines from your charts.  React to
what price is doing, rather than thinking about whether an indicator has
crossed above zero, or below oversold, or is diverging with price.  Trust
that you know what price is doing by watching price action and a few moving
averages, and trust you will respond appropriately.  The results may surprise
you.

Rob Chapman

(TradersWire: robbo)