Forex price action vs indicators
If you have traded for long enough, you have probably found yourself discussing at some point the issue between price action and technical indicators. Some traders — after a long battle with indicators — find a sense of elegance and simplicity in price action analysis while others argue that indicators provide for information that cannot be obtained from simple price action.
Is there a fundamentally better way to understand the market? Is there any advantage you can get from using price action? Is using indicators a way to ensure that you only produce systems that work in hindsight? Let us start by defining both concepts. Price action is generally defined as any interpretation of the market that arises forex price action vs indicators simple comparisons of raw market data. Price action strategies do not process raw market forex price action vs indicators in any way and therefore provide the purest image of the market.
Technical indicators, on the other hand, process raw market data in some way that may eliminate some information contained within the original data. Technical indicators go through data and return values that are an overall simplification of the underlying price action.
You could view price action as a loss-less way of trading while technical indicators are a filtered way of trading. From the above it could be easy to say that price action is better because it provides more information.
However, the amount of information in the market that is relevant for predictions is small, as the market is incredibly noisy. For this reason technical indicators provide a level of filtering that can be very useful in deriving systems that generate signals based on the forex price action vs indicators underlying market behavior that is interesting to us, rather than the noise that is above.
Indicators become more useful as the amount of noise in price action becomes larger as time frames go lower while they become less useful as the amount of noise becomes less. While a price action based system may have a very hard time producing viable signals in a lower time frame, a strategy based on technical indicators may be able to derive better results by simply looking beyond a lot of the noise that makes price action trading harder.
The above also does not mean that technical indicators become irrelevant as the time frame becomes larger. A technical indicator can provide you with information that is difficult to see across large amounts forex price action vs indicators data.
For example a technical indicator might be able to show you what percentage of the past X bars where bullish or bearish, something that is difficult to deduce from simple price-action based comparisons. This also does not mean that price action is irrelevant at low time frames as price action can often react quickly to some events that are difficult to see through indicator filtering. While an RSI filter might take some time to react to a market spike, this can be caught very rapidly with a price action based strategy that is making some quick OHLC based comparisons using data from only the past few bars.
However price action based systems can do exactly the same thing if they are provided with enough degrees of freedom. The issue here is related to the degrees of freedom of your strategy and not forex price action vs indicators the type of variables being used.
A strategy can be developed in an entirely sound way for any of these two approaches and neither one nor the other gives the strategy an additional probability to succeed under live trading conditions.
In the end both price action and indicators are sources available for the design of trading strategies and a smart trader would definitely take advantage of both to develop better trading systems. Indicators can be used as signal filters to get information that would otherwise be difficult to get, while price action can be used to provide additional confirmations, fast reacting exits, etc. Both of these sources have their uses and they can indeed be combined to arrive at a more holistic approach to trading.
Finally I would like to point forex price action vs indicators that it is very important to understand indicators whenever you use them. Indicators are signal filters and as such you should understand what they are filtering, what information they are giving you and how you can use this information to create or forex price action vs indicators a trading system.
Indicators can rarely be used successfully without a deep understanding about what they are calculating, how they are being calculated and what these calculations say about the underlying price action. I hope you enjoyed this article! Very nice article once again and I completely agree, price action alone is nothing better than an indicator based system.
Both use the same underlying price action, both can be valid or not, however you interpret them. There is no advantage for one over the other. Forex price action vs indicators action has always finite forex price action vs indicators. You fail to see that indicators on real numbers produce infinite possibilities. The possibilities are infinite here because abs ema a1 — ema a2 is a real number. All price action derivatives have infinite degrees of freedom and therefore pose the danger of uncontrollable data mining bias.
Contrary to that price action degrees of freedom may be large but are always a finite number. Thanks for your comment: The data-mining bias can be determined by the data-mining process you are going to carry out. Clearly you will be mining X within some step boundaries and within some degree of precision. Your observation does imply that one needs to be careful when using indicators for data mining but I believe it does not rule out the possibility.
In any case, always happy to read your comments Bob. Thanks again for commenting: The point is that the set of indicators involves infinite degrees of freedom although specific examples may not. The point is that in principle there are potentially infinite degrees of freedom involved with the use of indicators.
Let us consider an example. A has 6 degrees of freedom. Let us assume that he tested from 15 to 30 for the slow and 3 to 10 for the fast. There are 35 degrees of freedom in the best case. I think your analysis was done in haste. These things require math and examples. I expect more from you than unbacked arguments. You have to live up to your legacy. Forex price action vs indicators moving average strategy with a fast and a slow MA has only 2 degrees of freedom the periods independently of the number of steps or ranges that are used within the optimization process.
I am using the definition of degrees of freedom as formally given in statistics the number of degrees of freedom is the number forex price action vs indicators values in the final calculation of a statistic that are free to vary, see here.
In this sense your previous RSI example has only two degrees of freedom the RSI period and X although the number of possible permutations for X forex price action vs indicators be infinite.
A degree of freedom is simply what can vary, not forex price action vs indicators what measure that variation can take place.
However considering the number of permutations is fundamental for the determination of the data-mining bias as I believe was your point? In a simple optimization of a single hypothesis you are correct that a crossover has 2 degrees of freedom. In the context of data-mining, which was the original context of your post, each permutation is a degree of freedom. This is the case of a permutation playing the role of a variable in data-mining.
Each of the permutations resulting from changing those variables becomes in turn a degree of freedom of the data mining process. Not at all, I agree with you in that the data-mining bias can essentially be infinite for strategies involving real numbers, as you cannot know what constraints were used in their creation.
Sure, you need to be more careful and your data-mining space could be much larger but forex price action vs indicators can still do the process soundly provided you account for all the above. Mail forex price action vs indicators not be published required. Mechanical Forex Trading in the FX market using mechanical trading strategies.
Price Action Vs Technical Indicators: Facts, myths and real differences February 3rd, 7 Comments. Posted in Articles Tags: A practical forex price action vs indicators using rolling correlations. February 4, at 3: February 4, at 6: February 4, at 7: February 5, at 1: February 5, at 3: February 5, at 6: Leave a Reply Click here to cancel reply.
This article will debunk the five most commonly shared opinions on Price Action Vs. Trading Indicators and give traders a new perspective on the age-old debate. Price action traders claim that it is a much better trading method in general. But if you dig a little deeper, forex price action vs indicators action and indicators are not that different.
Candlesticks or bar charts are tools to visualize price information on your charts. Indicators take the same price information and apply a formula to it.
This will become more apparent in the next points. An indicator takes past price action the amount is defined by the indicator setting and then visualizes the result after applying a formula to it. Thus, what your indicator shows you is a result of past price action. To overcome the lagging component, you would have to set your indicator to a shorter time setting or only use a handful of past candlesticks to make your analysis.
However, the analysis becomes less and less significant the fewer information you include. Trading candlesticks are not as easy as it sounds and lots of components often get overlooked, such as the size of candlesticks, how they compare to previous price action and the component of momentum forex price action vs indicators volatility in wicks and bodies. This is an extension of the previous point. The old argument that indicator charts are messy does not hold up. When it comes to indicator trading, traders usually pick one oscillator to analyze momentum and another indicator for chart studies; a good combination is the Stochastic which is a momentum based oscillator and the Bollinger Bands which is a forex price action vs indicators and momentum based chart study tool with a moving average.
Indicators can provide guidance and help traders make objective trading decisions. There is very little room for subjectivity when it comes to analyzing an indicator. On the other hand, price action traders who look at blank charts can easily feel lost, lacking the clear reference points or tools to help them make trading decisions, resulting in acting emotionally or impulsively.
As always, such an argument does not hold up when we forex price action vs indicators a closer look. Whereas some traders feel more comfortable using indicators to take away some of the subjectivity, others prefer price action analysis.
Again, it is very hard to validate such a claim, and it all comes down to personal preferences. Indicators can save time, and they only look at very specific aspects of a chart — momentum indicators solely focus on analyzing momentum — to help traders process data faster and without much subjectivity.
In our opinion, it is important to approach this topic with an open mind and not get too carried away. It is important that a trader chooses his trading tools wisely and that he understands the pros and cons of the different approaches. There is no better or worse when it comes to price action vs.
It all comes down to how the trader utilizes his trading tools to make trading decisions. There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. Trading Forex price action vs indicatorstrading indicators.
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Com. 2013-09-04. Archived from the original on October 4, 2016.