This article on The Pros and Cons of Technical Indicators is the opinion of Optimus Futures.
Traders are always debating the merits of following price action with clean charts versus charts loaded with seemingly useful technical indicators. Newer traders especially often find themselves juggling both scenarios as they struggle to find their comfort zone and a method that works for them in the long term. In this article, we look at the pros and cons of both trading styles and try to determine the best route forward for a trader mulling the possibility of adding indicators to the chart for assisted technical trading.
Benefits of Following Price Action
In this first section we look at some important benefits that following price action yield.
The charts that a trader reads day in day out are often a reflection of his or her own thought processes. A clean chart with minimal indicators potentially represents a clear mind and approach to trading that relies on fundamental price movements as opposed to flashy indicators. Accessing a clean chart can appear simple and straight forward and can often be a lot less stressful than having to scan multiple lines, levels or bars that an indicator (or indicators) may present to you, in addition to price action itself.
While a clean chart will present price information up front, a chart laden with indicators will often layer other information on top, or worse, still the screen into sections dedicated to indicator windows that can sometimes distort or (compress or stretch) actual price information as represented by candlesticks or bars, potentially leading to flawed visualization of volatility levels and momentum relative to the existing trend.
The chart above is one laden with two common oscillating indicators that take up at least half the screen, leaving the other half to display compressed price information. Compare the size and visual clarity of the candlesticks in the chart above to the chart below:
Less Filters – Quicker Decision Making
A cleaner chart also frequently translates into fewer filters that a trader is potentially looking out for, allowing for faster decision making. When your main trigger points for actions are located within price action you are directly looking at without getting distracted by information on another window or overlaid on price information, you are much more efficient in the decision making process and will potentially react quicker to changing market conditions.
Of course the above mentioned benefit would perhaps have the most profound implications for day traders who take short term trades and rely on quick decision making for timely entries and exits in the market.
Trading Price Action Can be Simple
A major benefit of trading price action is the simplicity factor. Some of the top trading gurus who preach simplicity in trading are often found trading with totally clean charts or charts loaded with minimal indicators. They understand the value of price action information and do not find the need to complicate proceedings further in the name of added confirmations from technical indicators.
The result is often a simple process relying on few concrete factors that prompt trading decisions and allow for stress-free and comfortable trading environments that ultimately contribute majorly to their trading success.
Price Action Information Comes Before Information from Technical Indicators
Traders who tout price action over technical indicators will almost always bring up this critical point. Most technical indicators, being a derivative of price movements themselves, are often deemed to be lagging in nature; that is, they are expected to print information after the fact.
Price will need to make a move first to allow for the moving averages to cross over, or the MACD to turn around the zero line. Price will need to make a higher high first before it can be matched to a lower high on the RSI to discover bearish divergence.
Many traders, who directly follow price action itself, claim to be ahead of traders who rely on additional confirmations from indicators that present information after the fact, arguably ofcourse.
Benefits of Technical Indicators
Now that we have looked at a few factors that clearly roll in favor of trading with clean charts and following price action primarily to deduce your technical analysis perspectives, let’s take apart each of the above mentioned factors and see how they can also serve as a pitfall, and how they also make a case for using technical indicators as well.
Clean Charts can also be Stressful
While clean charts present less information that can be soothing for an experienced traders’ eyes and mind, the same limited information can give rise to anxiety for a newer trader who may be hungry for more information or additional factors that could convince him or her to enter or exit the market.
Technical indicators do often add more filters that can include a lot more objectivity in trading that newer traders feel more comfortable with. They may lack the experience or the knowledge to decode all the needed information from price movement itself and so additional confirmations from technical indicators are seen more as a blessing than a curse.
Quicker Decision Making Isn’t Always a Requirement
While following price action alone may transform you into a quicker decision maker, it is important to realize that many successful trading methodologies and styles do not rely on swift decision making. Most trading methods that are based upon longer term trades and analysis on higher time frames may not require the need for ad hoc and impromptu decisions but they may require extensive thought processes to execute trading actions. These elaborate processes often feed on information coming from multiple sources, and as such trading with very limited information on a clean or a near clean chart may not help.
Simpler Doesn’t Always Mean Easier
We contested above that trading a clean chart can be a simple process because it requires fewer filters and pieces of information to process. However, it is important to understand that simple may not always mean easier. To be able to make logical and informed decisions with limited information requires banking on experience and a wealth of knowledge that an experienced trader may have plenty of, but a newer trader may have a dearth of.
Trading a clean chart often includes high level of subjectivity and fine-tuned intuition that feeds of experience, something that newer traders may not always be able to employ. Such traders benefit from methods that also utilize added confirmations from technical indicators to support trading decisions.
Following Lagging Indicators Can be A Cautious Conservative Approach
We mentioned above that price action information will typically lead information presented by technical indicators. Again, it may not always be a requirement for a trader or the trading method to always stay ahead of the curve.
There are many conservative trading approaches that tout market entries and exits after the fact and with enough confirmations resulting in a high probability trading method. A strong bearish candlestick may or may not be indicative of a bearish reversal. But subsequent bearish price action that results in the moving averages eventually crossing over could result in a delayed but potentially confirmed indication of a trend reversal.
As you may have realized by now, trading with or without indicators is a highly personal decision and depends almost entirely on the trader’s own circumstances, risk appetite, experience and comfort level. It is impossible to categorize either approach as categorically good or bad, but depending on your situation, choosing one over the other may contribute majorly in determining your success as a trader.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.