Dangerous Opinions and Dangerous Indicators
By Bennett McDowell, TradersCoach.com*
Posted: Aug 25, 2006
When I began trading, my indicators, indeed, gave me signals that prices or trends may change, but they did very little to help me consistently time those changes accurately enough to make money. Instead, these indicators caused me to form counter-productive opinions.
The following examples show how opinions and indicators can be dangerous.
Opinion -- Example 1
Let’s say you have bullish divergence in an MACD oscillator, and you now have an opinion that prices should change from the current downtrend to an uptrend.
So, you look for a reason to go long, an entry signal. One comes along, and you take it. You think to yourself that you would not have normally taken that signal, but, with bullish divergence, you feel you should. Prices then continue downward even lower, and the bullish divergence remains bullish, so you stay with your long position.
"…Can’t go much lower…" you say to yourself. It does go lower, and, now, you’re worried, but you do not want to sell and take the large loss, so you hold on. After all, the MACD divergence is still bullish but not as much as before.
Soon the divergence turns into NO divergence, and, instead, the trend down becomes apparent and you now must sell out. You feel depressed, frustrated and betrayed by your MACD oscillator! If the oscillator had not been there, you would never have taken the trade to begin with.
Opinion -- Example 2
You get a trading signal to go long, but, this time, your Stochastic oscillator indicates that prices are overbought already, so you do not take the long position. The so-called overbought Stochastic oscillator helped you form an opinion that told you not to take the trade.
Now, you sit and watch a great uptrend happen right before your eyes, and the Stochastic oscillator remains overbought during the entire 10-point uptrend. Had you never looked at the Stochastic oscillator, you would not have had an opinion and would have gone long.
Opinion -- Example 3You see bearish divergence on the MACD oscillator, so you form an opinion that the uptrend is ending, and, now, you look to get out of your long position right away. You then use a trailing stop and exit the market. Only to find prices reversing and going higher and the MACD oscillator turning bullish. You are left scratching your head.
Examples of how opinions distort reality could go on and on, but you get the idea. And, the idea is that watching oscillators causes you to form OPINIONS, and OPINIONS are not in the best interest of the successful trader.
Strive to create an environment without opinions. That means avoiding reading financial newspapers, watching financial TV or listening to financial news in any form while trading.
News programs cause you to form opinions, trading oscillators cause you to form opinions and market analysts cause you to form opinions. We do not know how the markets will react to news and financial recommendations. If we think we do, we are forming an OPINION about the news.
How many times have companies come out with great earnings and sold off right after the announcement. And, when the market does sell off, the news commentator comes out and says “…the stock had run up already in expectation of the good numbers and then sold off…”
And, if, instead, the stock continued upward, the news commentator would have said, “…good earnings drove the market upward…”. News commentators operate on 20 / 20 hindsight. Traders don’t have this luxury.
*Reprinted (and modified) with permission from Bennett McDowell of TradersCoach.com, whose ART® charting software is available as an add-on to eSignal and can help you learn to listen to what the market is actually saying through price action and volume
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