There is an almost religious hunt for the eternal truth condensed in some indicator for a trading platform. Visit some trading forums and be amazed. People seem to think that there is the holy grail in trading that can be expressed with a simple algorithm. Most of them know that there isn’t such a thing like the holy trading grail, or that it resides elsewhere, for instance in the right trading mind. But nonetheless hordes of techno traders try to find it in their rather simplistic trading software.
That reminds me of the theologian who said to the philosopher: “You are like the blind man who tries to find a black cat in an absolutely dark room that isn’t there. Responds the philosopher: “Aha, but you would find it”.
Especially crazy is one implicit belief that seems to be ubiquitous, namely that you can compute your secret trading indicator on various time frames and it should still work.
That is similar to using candle stick charts for anything else than daily or weekly bars. Yes, that is also stupid. Just think about a delay of the prices by half of the time span of a bar. The candles would look totally different then, which means that they are meaningless.
The daily bars are different here. The night break is a natural pause that makes open and close different from the middle session. The time shift thought experiment would collide with the real market. This is directly visible at the volume and the velocity of price changes during open and close.
Using minute bars and shifting them by thirty seconds doesn’t matter, other than what is caused by the minority of day traders that use them and a bar specific interpretation for their trading. They may act in synchronous lock and impact the market somewhat. If the bars were drawn a bit differently, they would behave differently, while the real price action is exactly the same.
Conclusion, don’t put too much meaning in single bars if they are shorter than one day. “Open” and “close” of these bars, and therefore candles, should mean even less, namely nothing.
So, what reason do we have to hope that a change of the time frame does not harm our indicator trading? There is one strong argument for it and that is the time invariance of random formations that overshadows technical trading. Sigh. More meaningful chart patterns are also observed on different time scales.
The counter argument is this. With using an indicator or any more complex trading formula you imply that the market shows a regularity matching this algorithm. Generally this isn’t even true for a specific time frame.
Regularities in the markets come and go. They arise from the chaotic financial ocean like waves, unforeseeable, and dissolve soon after. The market must be largely unforeseeable. Otherwise everybody would win, which is impossible. The best you can hope for is to catch such a “wave” of new regularity with your antenna using the right wavelength at the right time.
Using a pattern matching machine that looks for complex timeless patterns will not work. It works for simple patterns, the best of it being the trend. It fails for a fixed complex trading algo. Even more so this search for the ultimate trading formula is hopeless if you demand it to work on different time scales.
The simpler the chart formation the better. The trend is the simplest one there is. Hence this site – Penny Stock Alerts!
Still, there is a solution. Instead of using a fixed formula of indicators that is both too complex to match a simple pattern like a trend, but then too clumsy to really mimic a market, use an automatically adaptable system.
There is a fine neural net trading machine that is able to much better “understand” the idiosyncrasies of a given price history. This may be hard to admit for an indicator junkie, but a trader should always be open-minded. This machine is it 😉
Just try it! It does everything automatically, so you can save your forum wasting time and focus on your new born beach trading from now on.