Why Adding Indicators Hurts Your Trades

ppteam · 发表于 2010-3-30 08:43 PM

I often hear investing "instructors" suggest that adding several technical indicators will increase the probability of a successful trading outcome. This is a fallacy that plagues a lot of traders, especially new traders. Trading the market is not just a numbers game. There are some things we know about statistical analysis that can help you understand why adding indicators can be a real problem and will hurt your trading returns.

For example, assume that you decide to use three different technical indicators. The first is a stochastics that has delivered a 40% probability of a successful trade in the past.

The second indicator is a MACD with a 30% probability of success. The final indicator is a moving average with a 20% probability of signaling a successful trade. If you wait for all three indicators to agree, what is your probability of a successful trade?

Many of traders and instructors I have seen would suggest that your probability is cumulative. Therefore, based on the numbers above your probability would equal 90%.

However, it doesn't take long for traders to realize that simply adding indicators does not actually result in those kind of returns - why not?

Technical analysts use indicators to make a statistical estimate of a successful trade outcome. However because one technical indicator does not affect another the analysis is being conducted "with replacement."

That is a statisticians way of saying that because the indicators cannot affect each other, merely adding more of them to a chart will not increase the probability of being right. In fact, from a statistical perspective, the probability of a successful outcome will always be equal to the most accurate indicator. In the example above that would be 40%.

The danger of this kind of analysis is that by waiting for confirmation from several indicators you have maximized the amount of lag before taking a trading signal. This decreases the average time you are in a trade and its profit potential.

Assuming that risk control (stop losses) remain constant, you have shifted the risk reward ratio further out of your favor. That is a very dangerous thing to do.

The underlying message here is a positive one. Managing and waiting for a dozen indicators to agree is time consuming and confusing. Specializing and becoming proficient in your analysis by simplifying the tools you are using is easier and does not come with disadvantages

ranchgirl · 发表于 2010-3-30 08:56 PM

The author does not know statistics, and assume others are more stupid than him/her.

ranchgirl · 发表于 2010-3-30 08:59 PM

Even his/her title is not wrong -----"Why Adding Indicators Hurts Your Trades"

jeff110 · 发表于 2010-3-30 08:59 PM

受益了，谢！

abaqus · 发表于 2010-3-30 09:11 PM

a real good one!

想发 · 发表于 2010-3-30 09:15 PM

CoolMax · 发表于 2010-3-30 09:16 PM

本帖最后由 CoolMax 于 2010-3-30 22:52 编辑

Totally disagree!

I guess he/she is not a good trader indeed or don't understand how to use the indicators at all.

I use two indicators to help me timing the entry points, your guys know it is not as bad as the author throught. right?

LOL.

abaqus · 发表于 2010-3-30 09:20 PM

Totally disagree!

I guess he/she is not a good trader indeed or don't understand how to use the i ...
CoolMax 发表于 2010-3-30 20:16

You are really use LESS indicators, just 2.

ranchgirl · 发表于 2010-3-30 10:10 PM

本帖最后由 ranchgirl 于 2010-3-30 21:12 编辑

Totally disagree!

I guess he/she is not a good trader indeed or don't understand how to use the indicators at all.

I use two indicators to help me timing the entry points, your guys know it is as bad as the author throught. right?

LOL.

CoolMax 发表于 2010-3-30 20:16

Thanks!

The author has no slight idea what statistics is and how to calculate probability. He/she assumes others know even less, presumably add some fake more stupid and ridiculous idea to others. That is really funny.

However, using too many indicators is NOT a good idea either. From this point of view, the author has a point.

happylux · 发表于 2010-3-30 10:27 PM

这种题目一定没有定论，一出来大家就吵做一团。偶们一旁看戏好了。

sds · 发表于 2010-3-30 11:12 PM

作者是不是亏钱了，发发牢骚。

CoolMax · 发表于 2010-3-30 11:58 PM

本帖最后由 CoolMax 于 2010-3-30 23:00 编辑

I know lots of trader only watch the bars to trade. but that doesn't mean indicator is useless.

Everybody who wants to be a successful trader need develop his/her own skills, by using indicator or not, it doesn't matter much.

What I really want to say is using indicator will help certain style of traders. I encourage you try it first. It would be one of the way to your success.

abaqus · 发表于 2010-3-31 06:32 AM

I know lots of trader only watch the bars to trade. but that doesn't mean indicator is useless.

E ...
CoolMax 发表于 2010-3-30 22:58

Make sense. at least, less indicator is better than more indicator.

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