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
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