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Weekly update – Technical Indicators – Do they really work?

In this video Kym takes up a question that he recently saw debated, ‘do technical indicators really work?’

Transcript

Hi, this is Kym Watson of EzeeTrader, welcome to a weekly review.

For a change this week I just thought I’d look at a question that was posed somewhere.

Do indicators really work when trading?

Now I’ve seen this argument posed for many years with different people. Does everyone use indicators? Do they use moving averages? Do they use Bollinger’s? What do they use? The question has been posed many times.

Of course, the biggest indicator and the best indicator out there is price itself. It tells you more than anything else on the chart and it should never be overlooked in terms of, what is it actually doing? Is it going up? Is it going down? Is it chopping a sideward pattern such as back here? What exactly is it doing? Is it dropping like here, very fast moving in a certain direction?

A lot of the things it’ll actually tell you and give you the guidance, used price with indicators, if people just look at the indicator and ignore the price action they generally won’t have such good success. If they’re looking at the price action and the indicator and putting the case together then suddenly they’ll find success.

There is a good case for fundamental analysis, it’s great, and probably better than looking at technical analysis over the longer term view. It possibly is.

If we look at a daily chart for a moment, or maybe it’ll need to be a weekly chart now. This big movement here which caused the fantastic down, I can pinpoint it to Draghi speaking…

He spoke, it fell, it’s as simple as that.

Were there technical indicators and were there things to get us into a trade to take advantage of this move? Yes. Very simple.

This is a weekly chart, this is nothing designed especially for any odd days or anything like this, it’s a straight forward weekly chart. There’s a 21 day moving average, why 21? It’s a Fibonacci number, does it matter? No. It could be a 20, it really makes relatively little difference. As long as you’re using it and you’re using it in a particular way.

Could I have taken advantage of Draghi’s speech here using technical indicators combined with price? Of course I could, and that’s what you should be looking at. Where could I have sold?

Well yes, the fundamentals were weak from this point here. From this week here the fundamentals became weak, he told us they were weak and he discussed changes. He didn’t make changes on that specific day but told there would be changes coming ahead.

So from that point here could we have made money using a technical indicator? Well this is a 21 exponential moving average, straight forward, nothing else. What happened; price broke through the 21, suggesting there was some weakness, bearing in mind if you look previously prices largely remained above the 21, relatively bullish. It’s not necessarily the best trend-following indicator to be looking at but it’s pretty good. Then prices fell through that indicator again.

It didn’t just fall through, it stays through. Largely on some of these locations, yes it came through, retested, came away again, ran through. Here it did exactly that, it came through, left a bit of a gap between itself at the moving average and come up untested. Could you have sold there? Yes.

Would you have made money?

The answer’s up to you there, you should have, it moved a massive amount. Did we all trade this and hold it all this time? Guarantee you no, because we tend to trade for short periods in a lot of cases. Whether there are some banks and some people that would have held this and run through, I’m sure there are people who shorted near the top, at the top, before the top, probably even back here they shorted and held on all the way through there, it doesn’t matter.

The important thing here is there was fundamental news that came out. There was price action that sort of occurred in the weeks following that, it rallied back into a key moving average here and it rolled over.

So there’s an example, looking at the same moving average, not doing anything apart from looking at the price action.

Let’s just double click here and move this up to current and look at this 60 minute time frame.

Same sort of principles; what’s happening with this moving average? Can I draw anything from it? Market’s starting to break down at this point here, it’s confirmed a lower high as it breaks through, so it’s starting to look weak. It’s broken through the 21, it’s come up and tested it.

First test, could I have sold at this point?

Yes.

Are there other indicators that might have got me a better price? Possibly. If I’d sold at this point, with some good money management I could have made some reasonably good gains.

Okay let’s put it to the test and follow it through.

Weakness, weakness turns to a change of direction, look what the price is doing. It’s put a higher low in, so it’s changing in direction. It’s popped another one in there, broke through, come back, tested the 21 moving average. Did it work?

Yes, because I could have made money out of this quite simple. Change running through again, what’s happening here? There’s a few little higher lows etcetera, and nothing that I can do too much with at this point here. Then price breaks down and really sells off quickly.

Could I have been in that from using this particular process? Probably not, it didn’t give me a set up from this particular process, but it did give me a setup back here. It had come down, cross through, first test, was the market in a downward trend? Yes. Was it making lower lows? Sure. Okay, reasonable chance, short, bang.

Then you get into this chop zone. Price is striding it for most of this time, can I trade the same process there? No, because it’s not given any gap. Here it ran through a little bit, sold off. Didn’t sell off massively but there was other technical analysis that may have said there’s a previous low there, it may find support just as we’ve seen in these points here.

So do technical indicators work?

Of course they do. Do they work all the time?

Of course they don’t, because otherwise they wouldn’t work, there’d be reasons for people to stop them working.

So I rest my case in terms of, yes technical indicators work. Are they a self fulfilling prophecy? I’m sure they are.

There’ll be a lot of people looking at a 20 a 21… does it matter if it’s a 20 or a 21 moving average that’s sitting here? Well if I change it to a 20, there we go. If I make it a 21, there we go. As I move it up towards a 28 moving average, whatever it may be, 30 moving average. In a lot of sense it makes little difference, okay some people may have missed one trade, may have got another trade with less drawdown.

It’s all about having a good technical indicator, a good understanding of looking at the price action, because that’s always the key. Is it breaking down? Is it weakening? Are there chances of getting in on the trend of the price action. Yes fundamentals will overrule them at times.

We saw this morning some price action on the Pound-Dollar with the reports here, they’d already done the first touch of the 21 moving average on here on an early point of view so… was it in a downward trend? Yes, it was at that point. There was money to be made if you were looking at trading between 12 or 4 o’clock this morning. However, off it ran and it’s back again.

So would it have been worth selling into it? Well it’s already tested so the answer is no, using my rules here of one touch first touch only. It’s broken through, whatever happened, I’m sure there were a lot of moving averages on the smaller time frames, it just trollied right the way through. Did we know news was out? Yes. So you can actually use this and ensure you’re not trying to get in the way of some fundamental news. They’re both important, they both should be respected.

Of course it’s important to understand the fundamental news that’s coming out, just as it should be easy to understand how the moving averages are moving and how you can trade them.

Okay, that’s it from me, hopefully you’ll find this useful, I’m very much interested in your views, if you want to post them, post them.

The most important thing is, can you make money doing so?

Yes.

As long as you’ve got good money management and are working with the price mostly, as opposed to trying to trade against the price.

Okay that ends my sermon.

Let’s have a quick look at the markets and where we are sitting at the moment using some good old technical analysis and get a bit of a picture.

We’ll start off with the Euro-Dollar first.

Now just looking from a daily perspective, loads of moving averages on that have already been tested. It does look at last that the Euro this afternoon is pushing up a little bit further, we could get a break at least 21. Let’s run it across here, and we could see it pushing, if it does do that we’ll start seeing these previous highs challenged. At the moment I’m really watching for those. I need that area to be daily bullish, I’d love to see those highs taken out and then move above there.

At the moment with the news and the situation it comes back to looking at technical analysis and then considering the fundamental analysis which is important as well. If the Greece situation is sorted out, I think we would see these highs taken out quite easily and a decent relief rally. It may continue, in the long term I remain bullish, but it may continue in the bearish situation in the longer term, but we’ve sat here with lots of negativity, and it’s sat here and it hasn’t really continued to make new lows.

Each morning when I look at the review I’ve been saying if it breaks this trend line here I’m looking to go short with the target of those prior lows, and I would still look at that situation at this juncture. If it does get up here, break these highs here and we get some sort of solution, we could be on for a bigger retracement.

Looking at the Pound-Dollar, similar situation in a sense. It’s been sitting here chopping away, managed to break and today so far we’ve broken above that 50 MA. It’s hanging around there, hi the daily 50, first time it’s been hit. May get a bit of retrace off there. There was fundamental news that pushed us up prior to then and gave us a kick-start to get that moving, and we could see a follow through of the effect of that fundamental news.

Technically, we’ve put higher lows in, higher high effectively that’s just been reached there. If we can close above these prior day’s highs here, I would have to then be erring towards the bullish side more, but capable hands without doubt being the stronger of the European currencies over the last few days, in a sense.

Dollar-Yen, showing some weakness again, it’s been sitting. Once again we’ve had this long period of consolidation on the dailies, makes it very difficult to really trade too much. It has more recently effectively broken out of that retesting at the moment, but we’ve got some major support coming back up around the 122 area and that will probably remain a bit of a line in the sand. If it can and it does start pushing up towards there… we’ve already come back pretty close to these prior highs actually. Let’s just move those off there and draw a proper trend line across the top there and pop that there, and we’ve come within a whisker of these prior highs here. So it’s sold off at the moment and there’s still the potential for some further upside.

If the Dollar starts weakening before I’d be looking for the downside on this, I’d need to see a break of this trend line across the lows here, so effectively it’s showing a bit more of a switch back. I’ve got to be looking towards the longer side at the moment.

The retail sales this afternoon didn’t come out very well, so there’s a bit of retail therapy gone a bit wrong there.

Okay, Aussie Dollar, weak jobs reports, etcetera, that are coming through, again pretty much close to the early month lows for February there, so it’s sort of a repeated comeback towards that sort of area, managed to pull back at the moment. To me it remains a very weak currency in terms of the risk in Asia and it’s very affected by all things happening in Asia and we could see a continuation to the downside.

Any dollar weakness, well we still haven’t hit the monthly pivot, and the break of the… there’s a little trend line that’s running down in the shorter term. Could see me be a bit more bullish with the thought of it coming back to that sort of area and retesting, coming back towards the 79 or 78 area. As I say, overall trends obviously down at the moment and that could continue for now.

Finally, Canadian Dollar, very linked in towards the energies and we’ve seen them all gain a little bit today, the Canadian Dollar has taken a bit of a positive step against the US Dollar, remembering this is USD-CAD, so a little bit of strengthening here.

We are getting in quite a consolidated phase around here which doesn’t necessarily make life easy in terms of trading and this is the sort of thing we’ve seen with the European currencies of late, which if you’re a trend trader and you like looking at the trends, it’s a little bit more difficult to pick out exactly where it’s going to go here.

For now I’m really only looking for the long side potential on the Canadian Dollar, but I’ll stay out of it until it gives me good long signals.

For now it’s got that potential to come back and test that 21 again, it’s been tested quite a few times to the daily 21, could come back and test that, may even break it this time. I will only start looking on the short side if we start breaking the early February lows.

Okay, that’s it from me, hope you have a great one, hope you found the update useful. Bye for now.

6 Comments

  1. Paul McKevitt-Reply
    February 12, 2015 at 5:19 pm

    Great video Kym, very informative thanks.

    • Kym Watson-Reply
      February 12, 2015 at 8:36 pm

      Thank for you note Paul, it is appreciated.
      Best wishes
      Kym

  2. Darren Cornish-Reply
    February 12, 2015 at 7:35 pm

    Thanks kym,

    It is absolutely true what you say about over complicating charts.

    I am a fairly new trader and find that although the move from etx charts to eSignal has been a positive one, i do find myself more confused with the amount of information available. Trades can be harder to identify and at times i find myself having both eSignal and etx charts open at the same time.
    Also for a new trader it is not just about finding trades, but how to go about it in the most efficient way. The journey from using a 1 monitor system to using several monitors is an art in itself. Finding and collating the many sources of information and making it all available at the click of a button can take a lot of time.
    Having said all this the past 3 months have been most rewarding (not always financially).
    Every day i learn so much more and thank you and Charlie for all your support.

    • Kym Watson-Reply
      February 12, 2015 at 8:35 pm

      Thanks Darren. I agree it is far too easy to get bogged down by too much, unfortunately it is not just new traders that have this problem. We note that many traders failing to be successful with one indicator chases the next great holy grail often only to lose money as they fail to apply good rules and money management.

      Best wishes
      Kym

  3. Gavin-Reply
    February 12, 2015 at 7:38 pm

    Great video, I can see how you read the PA and combine it with TA, however I think understanding the fundamentals gives you a far great depth of what is really going on in the market. It was interesting to see that you mentioned GBPUSD and referencing the news that came out today, however to trade GBP it would have been more wise to pair up GPB with a weak currency, like EUR or JPY. If you look at the results on EURGBP and what happened with news today it was fairly dramatic compared to GPBUSD.

    You also had a quick glance over AUD and could not see anything that jumped out with regards to TA, however the AUD bank has stated that they want the currency at 75.xxxx. With that info at hand, all one needs to do is listen to any news event from AUD and if they make any disparaging comment its guaranteed to plummet and chase that 75.xxxx price level.
    Do not get me wrong, I am not bashing TA, but I think the banks dictate where they want price to go and soon it follows. I think TA can be used in a granular fashion to skillfully get in and out of that ride downwards.
    Kind regards
    Gavin

    • Kym Watson-Reply
      February 12, 2015 at 8:27 pm

      Thanks Gavin. The ‘weak’ pair you refer to as the EUR/GBP had a range of around 80 pips today verses the more liquid pair of the GBP/USD’s 190 pip range, plus cable offered the constant trend. The GBP/JPY had a bigger range but the price action was clearer with the GBP/USD. I personally prefer the major pairs as to the cross pairs, as I know from brokers that the biggest money is lost by traders chasing these.

      Central Banks do not always get their way. There are plenty of examples where they have intervened and lost out. Previous attempt by the SNB cost them a fortune, we all remember the attempt by the BoE which cost the UK £3.4Billion. Of course that is not to say that the AUD may not get to the 75 level as the fundamentals are relatively poor and their biggest trading partners are seeing growth continually fall.

      Best wishes,
      Kym

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