Saturday, April 19, 2008

Trade On The Price...Not On The Indicator!!!

This by far the most sensible statement I have read. And before someone yells at me let me clarify I am not berating Indicators or Oscillators. I myself use them extensively but after what I read today, I will try and use them more sensibly. Here is a brief note on the article I read. As we all know that our biggest enemy in trading (at least mine!) is the Emotional Behavior. Yet another culprit is, the misuse of indicators and oscillators (yes I am guilty on this front too!). We must understand that the movement in price, in any and all free markets, is a function of, the pure laws and principles of supply (resistance) and demand (support). Opportunity exists when this simple and straightforward relationship is out of balance, period. Let's now explore reality through the eyes of objective logic. When prices are trading sideways, supply and demand are in balance. The only thing that can cause a price rally from an area of "balance" is when the supply and demand equation becomes "out of balance." In other words, there were many more willing and able buyers than there were sellers. Simple economics at work!!!

We spend so much time in trying to discover or finding that one perfect indicator (I was in this trip for almost a year before I decided to end my search, and embrace KISS!). Yet we find ourselves heading nowhere. There is a reason for this which is the one thing you need to know about indicators and oscillators: They have NO IDEA there is an ongoing supply and demand relationship at work every second in every market at every price level. They are simple math calculations derived from price. Most are averages of price, which means they lag price. Any indicator that lags price adds risk and decreases profit margins in your trading which is not ideal. Lets take an example of Moving Averages (I cant live without them!), Moving Averages lag. They are averages of past data. They can only turn higher after price does. So if waiting for price to move above the MA to enter we are risking;

  • First, risk to buy is high, as one would be buying far from the supply/demand imbalance.
  • Second, profit potential is decreased.
  • Third, those who wait until prices have crossed back above the MA to buy will likely provide profit for the reality-based trader/investor who bought at the low risk/high reward entry area.

So now the question is how do we eliminate this problem? The answer is quiet simple; when an indicator or oscillator gives you a buy signal when price is also at an objective demand (support) level, that buy signal is likely to work. The key is to only take those buy signals and ignore the rest. In doing this, we are filtering an indicator through the laws of supply and demand and this is the key in using any indicator or oscillator.

This is neat stuff I will be tryin2incorporate this funda in my trading. In case you also apply this and find success do let me know!!!


Mustafaa Imran Ali said...

Dear Mr. Manoj,

I have started visiting your blog after Mr. Sunil (TINAMO) referred your blog in one of his posts last week.

I find it to be very informative and would like to recieve new posts of your blog thru RSS feeds. Its very much easier to track posts in different blogs.

So I request you to please incorporate RSS feeds in your blog.

Anonymous said...

Henceforth onwards you will be referred to as "Gyan Guru"
Thanks for these pearls of wisdom

Subrata Bera said...

"So I request you to please incorporate RSS feeds in your blog."

It's already there. Try to use another browser like Opera or Firefox. Or try the following link-->

Tryin2Trade said...

Dear Mustafa,
Hi, yes I have added the RSS feed as requested.Thank you very much for your appreciation.

Tryin2Trade said...

Dear Anonymous,
Thanks for ur kind words.I would have preferred if you had left your name.No I dont wish to be referred as GYAN GURU. Like you I am also a learner,the only difference is that through this blog I share what I am learning.Real fun will be when we all can convert this gyan into trading profits.SO wishing the best for every body.

anjaniforcast said...

i visited your blog. it is useful and want to be a successful trader but my advice you don't take intraday positions atleast your horizon should be 2 or 3 days,week or whole month,then you will be gainer in long blog is new but if you visit and post suggestions ,it will help me.

sodhan said...

James Dalton has published book on supply and demand key is do not buy balanced market buy when unbalanced and that level should attract volume otherwise price again goes to balanced area.Volume chart printed is complicated.Will request you to add some simple article on demand and supply.However at extreme reversal of trend indicator divergence with price add to confidence.