I recently read a thread on one of the many Forex discussion boards, “Show us your Trading Station.” It had pictures of traders’ setups. One shot I found intriguing: the fellow had eight, yes EIGHT, computer monitors.

I could not resist; I emailed the trader. I learned he uses 37 indicators and charts for each market he follows. Amazing, at least to me.

I want to show you how my mentor Charlie taught me to replace indicators with a single bar chart. He called it Eyeballing a Chart and 35 years after learning how to do it, I’ve yet to find an indicator or indicator battery better or more effective.

First let me tell you my concerns (and Charlie’s) about indicators. I think I’ve seen them all!

Indicators

The vast majority of indicators are either trend-following or trading. That is, they are designed for following trending markets or following trading markets. The grandfather of the former are moving averages; of the later, oscillators and relative strength.

Note here that the medium can also be the message; moving averages and oscillators can also refer to how indicator information is massaged. These can be ‘weighted’ in many creative ways: forward, backward, logarithmic, exponential, volatility – but alas they are what they are – you can torture the data but it still won’t talk!

Charlie felt the trader paid a lot for an indicator. His concerns:

1) An indicator takes time to keep. This was BC, but it is still a factor. Charlie would note the amount of time the fellow noted above spent tracking his indicators. He’d suggest it be better spent looking at the price chart.

2) An indicator takes your focus off the actual market, as depicted by the chart. Traders aren’t buying and selling indicator points; nor do you enter an order for an indicator point. It’s all about prices and a chart is the ultimate first-level way to see price history.

3) Indicators are second-level tools. There is an information theory issue here. Each time you convert information a) Something is lost to ‘noise’ and b) You may not always really know what you are actually measuring once the data has been ‘tortured.’ The more it is tortured, the less it’s actual tie to prices. One spin off of this: traders begin assuming their indicators process magical properties and abilities. When something goes wrong you find you’ve destroyed the informational ladder back to prices that you need to find out ‘why?’

4) Scalability and weighting are subjective. Why a 5-minute average? Or a 30 minute oscillator? What is the underlying logic of your choice? If a 30 minute data-set worked last week – what leads you to believe it will work this week?

5) Descriptive rather than predictive. What, if any, logic is there in concluding that the description you’ve made of past prices will have any predictive value? This goes to the heart of the problem of technical analysis which is another Forex Strategies, another time.

Ultimately a relative strength indicator or a moving average is measuring some functionality of the old high-school algebra slope-intercept formula, Y = mX +b. You’re really just measuring the slope of the price line; the specifics determined by your at least partially subjective choice of variables. I.e.  a 10-day moving average or a 10 minute moving average.

This is an excerpt from Jan 2007 issue of Trader's Journal. To view the complete article, please click here.