Don’t be like Mr Squiggle – Why Price and Volume are the Best Indicators

Early on in my trading career, I was intrigued by technical indicators. So intrigued that I spent the best part of two years researching every single indicator I could. You name them, I’ve researched them. From the Advance/Decline Line to the Zero Lag Exponential Moving Average - and just about everything in between. Each indicator that I came across was not without its drawbacks, whether it be that it was ineffective in certain market conditions, incompatible with the way I thought about markets, or in some cases, simply too damn hard to use because it had too many rules and then exceptions to the rules. Then there were the conflicts. One indicator I liked would be saying strong buy and another indicator I liked would be saying hold – or even sell. There was no consistency and it seemed like I could find an indicator to tell me just about anything I wanted. Looking back, I know very clearly what I was searching for. The analytical version of me would claim that I was just being thorough, exploring all the possibilities on offer in order to try and develop my ‘edge’. The realistic me, however, would admit that I was searching for the holy grail of trading, the magical indicator or combination thereof that would deliver 2:1 reward to risk on 80% of the trades it identified. The sure-fire money-spinner that no one else was using. As crazy as it seems I think all traders, at some point throughout their journey, look for this magical setup. If they just stopped and thought about it for a moment they’d realise that it simply does not exist and, even if it did, they wouldn’t be reading about it in some textbook. Throughout my two-year expedition into the ‘land of the lost indicator’ I learnt a lot of valuable information about how to assess markets in general, as well as individual stocks. But the reality for most people is that they don’t have two years to dedicate to such a pursuit. The good news is that even if they did, there would be no point in any case. And here’s why. Not too long into my search for the holy grail I stumbled across a very important piece of information that I would come back to towards the end of my journey. That piece of information was fairly subtle and I honestly did not appreciate its relevance at the time. Without further ado, here it is; all technical indicators are mathematical variants of six key pieces of information;
  • the open,
  • the high,
  • the low,
  • the close,
  • the range and
  • the volume
There is nothing more to it. For some indicators, there are some very clever maths involved… but all indicators are derived from those pieces of information. So, what do you really need to look at when it comes to charts? Price and volume. That’s it. You can get everything you need to know simply by looking at price and volume. You can add some moving averages to get a better visual indication of the trend. And you might also add one or two favourite indicators to provide you with some specific action points in the market. But price and volume are what you should pay most attention to because it really is all you need. If you took everything else away and only had price and volume, you would be fine. If you had a MACD by itself… forget about it. It wouldn’t tell you anything. Below is a chart showing nothing but price and volume. Below is a random MACD... you can trade off the top chart, you can't trade off the MACD by itself. As a final thought, I’ll leave you with this story which was told to me by my trading mentor, Stuart McPhee. He used to do a lot of private trader coaching and the story goes that upon seeing this client’s chart template, he couldn’t even see the price. The chart was so full of trendlines, signals, annotations, indicators, moving averages and the like, that he couldn’t even see the price anymore and it looked like something Mr Squiggle had drawn. Don’t be like that. Don’t think there is a holy grail of indicators. The best thing you can do is know your style, find a couple of indicators/moving average which work for you, and keep it simple. Cheers, Chris Conway | Chief Operations Officer MBA LLB BEc GradDipAppFin DipTA(ATAA) CFTe(IFTA)  

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