Indicator soup | stockbee


Indicator soup

Whenever I post chart, invariably I get questions on what indicator do you use. Now long time readers know, there are no conventional indicators I use. Now there are many traders who swear by their indicator. Lot of time they believe in the indicator rationally or irrationally and it works. Indicators are much like placebos in medicine.

I have studied and thought about indicator a lot. Basically indicators are of three types- lagging, leading, and hybrid. Lagging indicators lag the price move. Almost all lagging indicators are derived by averaging series of values. All such average contain lag. SMA, EMA, Adaptive Moving Averages, and various other methods of deriving averages ultimately have lag.

Leading indicators are basically variation of Rate of Change. Leading indicator show acceleration and hence are called momentum indicator ( stochastics and many dozen other variations with different names of it are all leading indicator) The central hypothesis in such indicator is that trend decelerate before it can reverse. So divergence is what you look for in such indicator. The problem is many time the trend decelerate and instead of reversing it accelerates.So they tend to work in range bound markets, but are mostly useless in trending market.

Hybrid indicators like MACD are basically used to overcome problem with both lagging and leading indicator.

Then there are "belief" indicators like Gann, Fibonacci and several mystical variations of them. If you believe in them they work. If you believe in voodoo doctor voodoo medicine works.

As against all these indicator, what I look for is rate of change from a pivot low. The pivot might be 260 days low, or 65 days low or one month low. The advantage is it gives you absolute value. You can compare stocks. A stock having gone up 1087% in 260 days (FRPT) is different from a stock that is up 20% from the 260 days low. The value allows you to rank your stock and select. So faced with a 4% breakout or Episodic Pivot you can select the one which is up 100% plus or the other which is up 20% over same period of time. It is very simple and allows you to separate strongly trending stocks from non trending stocks.

The other problem with the way indicators are used by most traders is, they have absolutely no idea about how they are calculated. 90% of the traders who use MACD have no idea how it is derived. So there is often temptation to add more indicator. Ultimate result is an indicator soup.


Amit said...

EXCELLENT Post Pradeep! You explained it keeping it simple.

walter said...

pradeep - question:

regarding the 3 day low stop rule, does the stop trigger when the stop price is hit or on a close below the stop or some other condition?


walter said...

also, does the fact that RVBD hasnt broken out to new highs (vs something like RKT) affect your trade?


Pradeep Bonde said...

When price is hit.
New high does not matter in my scheme of things.

walter said...

thanks for info...

gosu said...

Kool buddy. Why don't you join Goldman Sachs? They will hire you in a heartbeat.

Niranjanam said...

Hello Pradeep,
I was struggling with Chart patterns and indicators for the last three years.Thank you very much for showing me the right path.Now I am safely out of the TA jungle and I am confident that I can progress on my own.
Thanks once again.

leon t said...

based on your example of value which one of the two stocks would you select?. the one up 100% or the 4% breakout on the 20% stock over the same time period.thanks

Pradeep Bonde said...

I take 100% plus because I am looking for higher returns. If one wants lesser risk and lesser return , 20% is good.
Large cap and well established companies should be bought at 20% plus move.

dee said...

you said you look for rate of change from low
can you explain what to look for in chart any indicator like obv
what is the time period on indicators if you use any
i mean cci 20 days or 10 days
or 90 days

Pradeep Bonde said...

None of them.
The formula I use is
(Close today- minimum close in last 260 days)/minimum close in last 260 days

If you convert this to % it gives you how much a stocks has moved from its minimum price in 260 days.
Lets look at FRPT
Close on Friday= 22.81
Minimum close in 260 days 1.89
Growth from 20 days min close= 1100%
close on friday= 24.57
minimum close in last 260 days= 2.22
Growth= 1000%

I trade stocks which are up at least 100% plus . Because they have momentum.

Nothing to look in the chart.

dee said...

Number of stocks with 100% plus move = 440

Number of stocks up 200% or more = 96

4% plus signals for 100plus universe = 32

4% plus signals for 200plus universe = 7
hi pradeep
thanks for all the answers
what makes you decide which stock to buy
out of 440+96 universe and then from 32+7 universe
i made some trades on this episode and momentum based but i am not sure what other information one should take
i bought vdsi, trcr,swir,simo
on friday morning open
it seems i am always late to the party

Pradeep Bonde said...

Out of the 32 I buy
1 The stock with highest 260 days growth
2 Stock which recently made it to 100% list
3 Stocks which have prior weakness , this applies to first 2 cases also.