Indicator Madness in The Crypto Space.

 

My goal with this post is explain why indicators hurt your success as a trader and why you should learn to trade based off a naked price chart instead.

1. The Data

The indicator confusion stems from the fact that all indicators are second-hand. You are analyzing and interpreting data that is a variation of the actual price action. When you are using indicators to make trading decisions you are following a distorted view of the market. All you need to do to remove this distortion away from yourself, and you will see the clear vision of what price is doing in the market. It really is that simple, what is happening in the crypto space is a lot of beginner traders are getting suckered into these clever marketing schemes. You may have noticed the “Elliot wave” phenomenon or people selling these fancy indicator systems on twitter.  They believe that if they learn to master a complicated indicator they will for some reason start to make money consistently in the market. Sadly, this could not be further from the truth and is simply over complicating your ability to learn. A large case of “Fancy-Play Syndrome”.  Let’s begin by looking into the two main classes of indicators and see how they are flawed.

2. Leading and Lagging Indicators

Technical chart indicators are part of either a leading or lagging indicator. Lagging indicators are known as momentum based indicators, the most popular being MACD and moving averages. What these lagging indicators claim to do is help traders make money by spotting a trending markets.  The problem is how they are often late, meaning how they can fire off a buy or sell signal after the market already has started to trend, usually just as it is ready for a counter-trend retracement. I will not name any names however a lot of popular crypto traders like to do this with altcoins. They will post the MACD and dozens of other indicators after a coin has already broke out. Surely enough as you will see later on, is how often they actually retrace.

 

Another major issue with lagging indicators such as the MACD and moving averages is how they will chop you to pieces or get you stopped out in consolidating markets. The indicators fire off buy and sell signals right when the market is ready to reverse and retest the other side of the trading range. Which is what btc has been doing to a lot of people lately. The ones who been using these indicators to push their bias, most of the time it ends up with them being on the dead end wrong side of a trade.  The main use of these indicators is trend identification or determining support and resistance.

Leading indicators include the popular stochastic, Parabolic SAR, and Relative Strength Index (RSI) which are known as oscillators.  The problem with these indicators is how they work horribly in trending markets because they show over-bought and over-sold conditions nearly the entire time the market is trending. BTC for example, during its extreme bull run was always incredibly overbought for the majority of the uptrend.  The opposite happens in a downtrend; these oscillators will continue showing over-sold market conditions continually.

These leading indicators have traders trying to constantly pick tops or bottoms, just like what we are seeing very clearly with bitcoin right now. The major problem is no one no matter what they try to tell you will know how a long a market will trend for. This leads to a bunch of false signals before the actual top or bottom occurs. Most of these traders on twitter are mainly marketers trying to hook you into their groups from these indicators based systems, whether it be by calling the exact top or bottom or something other “magic indicator”.  What they hide from you is the numerous losing signals fired off leading up to the actual top or bottom.

So we have lagging indicators that work ok in trending markets but terrible in consolidating ones, and leading indicators that work ok in consolidating markets but terrible in trending markets. You have traders combing both of these indicators on their charts to “filter” each other out. What do you think is going happen when you place numerous opposing indicators all over your charts? You get confusion. A mess that will add doubt, hesitation, over-trading, added leverage, and emotional instability.  All demons you must slay in order to become a successful trader.

3. Clean and Messy Charts.

Lets dig in even more by analyzing some charts.  We can compare indicators and price action by looking at a simple vanilla chart.

Below is XMR with the mess of fancy indicators.

 

XMR

You can quickly tell how confusing this is. Having all these indicators make trading complicated and more difficult than it is. Most of the time traders have what looks like a light show coming out of their charts along with these indicators.  Below is XMR being shilled by a notorious marketing guru who is considered a trader. This chart was pulled straight from tradingview.

The MACD is firing off a buy signal after the market already has started to trend and in this case was ready for a counter-trend retracement. Which as you saw above the price corrected hard. Take a look how the chart looks with pure price action.

XMR

This is the same chart, the only difference is you can actually see what is going on. A couple horizontal are drawn in to show support and resistance levels. By learning to read natural price movement you can trade very efficiently.  If you had all those indicators on you would have it taking up a significant bottom portion of your screen as you saw above. It becomes clear after you do this, why would you want to find some other way of analyzing the markets from something other than price. You can use indicators, which analyze data derived from price… or you can actually trade price action setups that is the actual core data.

4. Clarity

When you are trading off an indicator free chart what you see is very obvious. Charts tell you a story. If you have 5 different indicators on your chart telling you conflicting messages, you are not focused on the whats natural. Trading with less parameters will allow your brain to work more efficiently. This allows you to develop and create your own traders gut instinct. As you practice and become a better price action trader you will eventually be able to look at a chart with a higher degree of accuracy and precision with less effort and hesitation.

 

Below is the chart for BTC last year. Obviously you would of been much better off simply trading the price action and not trying to over analyze its parabolic uptrend with a bunch of squiggly lines and messy indicators all over your charts. Believe it or not my example charts are actually cleaner than the majority charts out there right now…

BTC overbought

5. Conclusion

It should be extremely obvious at this point why price action is a much more efficient strategy than any indicator based strategy. If you really want to hone in on the price dynamics and mechanics of markets you need to learn with an indicator free chart. If you don’t end up as an expert in price action it will still be invaluable to you by learning the skills necessary from learning a pure price chart. If you find another system your knowledge of price action will make what you decide to learn even more effective and would only improve your edge.

In conclusion, when most people first start trading, indicators seem like this magic system that when figured out will make you endless money in the markets. It keeps you blind and focused on learning the wrong things such as when your favorite indicator will tell you what to do and when to do it. Price action is great because it will teach you to form decisions with greater accuracy and speed since price action is the most current market analysis tool you can use. With practice you will develop your instincts to a point where you can clearly identify and find high probability price action signals.  If you have been struggling in trading, dropping the indicators and learning price action can help you get your trading on the right track.

I hope you enjoyed, if you are able to scroll back up and give me a shoutout on twitter I would appreciate it!

 

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