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How and Why Chart Signals Are Failing in the Current Market. . .
Poisoned Technicals Unveiled. . .
If you've ever had a "hunch" there might be something wrong with technicals. . .
You were right. . .
Just to name a few tools that supposedly help traders and investors make money in markets. . .
- MACD (Moving Average Convergence Divergence)
- Stochastics
- CCI (Commodity Channel Index)
- Fibonacci. . .
Each of the above technical tools are either built for failure, or the explanation of such to traders and investors - from mainstream sources- is so wrong, losses are virtually inevitable when attempting to use the aforementioned in real time, in real markets.
If you've ever used common technical tools while attempting to trade, and suddenly found your positions not working out. . .this bulletin is for you. . .
Let's crack one open right here. . . Right now. . . Just to prove it. . .
Ever heard of stochastics?
Stochastics is one of the most common technical indicators within markets, used by millions of traders and by thousands of "professionals." And yet, the indicator was built for failure from the start. . .
Check this out. . .
In the chart to the right, readers will notice the Euro|US Dollar, on a one-hour basis. . . Interestingly, in the bottom oscillator "stochastics" provides seven signals in the period measured, four of which are accurate and three of which, fail. . .
What we're talking about is a 42% failure rate. . .
Are you serious - 40% false signals?
You bet. . .
Now let me explain why. . .
We must take a moment to look into the formula for stochastics for the answer. . .
Please don't worry too much about the math, just understand the theory. . .
The formula for stochastics is relatively simple, containing three main parts. . .
1. %K = 100 * [(Recent Close - Lowest Low) / Highest High (n) - Lowest Low (n)]
2. %D = 3-Period Moving Average of % K (This is the "signal line.")
3. (n) = Number of periods used in calculation.
Here's really all you need to know about the above formula. . .
In part #1, %K - The first part of the formula is calculated as "Recent Close - Recent Low."
On a common sense basis, does there appear to be anything wrong with calculating the indicator with "Recent Close - Recent Low"?
If you just asked, "What about the high?" You're right on the money. . .
The way stochastics is currently calculated, the formula completely leaves out any acknowledgement of the recent high.
What this means is the indicator is only accounting for half of the data and thus, completely missing the other half. . .
And that's why the indicator is seemingly wrong over 40% of the time. . .
Need more proof?
We recoded the indicator to include "Recent High - Recent Close", instead of the traditional "Recent Close - Recent Low". . . And check out what we observed. . .
The indicator now shows signals exactly opposite the traditional "broken code."
What we're saying is by recoding the other side of the equation into the indicator, we immediately observed the other 40% of the missing signals. . .
No wonder retail traders lose! They've been spoon-fed an indicator that is BUILT TO FAIL almost 40% of the TIME!
In some cases, they've even been fed the indicator by "pros" and "gurus" who don't even know the junk they're peddling is horribly broken. . .
And it makes sense that these supposed "pros" and "gurus" don't know really. . .
After all, most don't even trade with real money, which is why they wouldn't know.
It's like someone teaching people to drive a car, when he's never even been behind the wheel himself. . .
So many of the supposed "gurus" have never even driven the "trading car" themselves, but that won't stop them from telling the world they are an "expert." [sigh]
In today's lightening fast, high volatility markets, there's just got to be another solution that actually works for retail traders. . .
No more newsletter and media hype. . . No more bogus technical indicators built to fail half of the time. . .
No more just "hoping the signal will hold. . ."
It's time to start utilizing tools and methodologies that have rock solid probability, helping to ascertain why a signal will hold tomorrow, other than just "hoping it will" based on the fact that it was observed showing a correct signal yesterday. . .
We need empirical proof of why a signal will work tomorrow, over yesterday, other than the fact that it "just did" work yesterday for whatever mysterious reason the "pros" and "gurus" can't really explain when pinned down. . .
Right now, it's time to start seeing volatility illuminated, putting the power of trading back on your side once and for all. . .
Limit of Liability/Disclaimer of Warranty (EXTENDED)
WallStreetRockStar.com, FxVolatility.com and Mark Whistler] ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The principals, analysts and employees or affiliates of Company may hold positions in the stocks, currencies and/or industries discussed here.
You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies.
The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you.
In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice.
Examples presented on Company's website are for educational purposes only. Such setups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax adviser to determine the suitability of any investment.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
ADDITIONAL NOTICE TO FOREX/CURRENCY TRADERS
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial adviser if you have any doubts.
THE INFORMATION AND STRATEGIES IN THIS BOOK DO NOT MAKE ANY PROMISE, OR GUARANTEE. MARKET CONDITIONS CONTINUALLY CHANGE AND THUS, INFORMATION PROVIDED IN VOLATILITY UNLIMITED COULD CHANGE AS WELL.
YOU SHOULD SEEK PROFESSIONAL ADVICE PROACTIVELY, DURING AND AFTER ATTEMPTING TO IMPLEMENT ANY STRATEGY/INFORMATION NEW TO YOU AND YOUR TRADING KNOWLEDGE, OR STYLE.
NEARLY 95% OF ALL RETAIL TRADERS LOSE.
PLEASE DO NOT ATTEMPT TO TRADE FOREX IF YOU FEEL THE AFOREMENTIONED EVEN REMOTELY APPROACHES YOUR RISK TOLERANCE. THE BEST ADVICE TO MOST INDIVIDUAL'S CONSIDERING TRADING FOREX IS UNLESS YOU HAVE PROFESSIONAL HELP - DON'T.
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Reader Response
July 1, 2009
Dear Mark,
Your book is very powerful, a real game changer... an absolute work of genius."
N e w t o n illuminated natural forces, Einstein illuminated energy and now your work/book has finally broke through and illuminated the forces and energy behind price action and volatility in the markets... (Brilliant!)
On a personal note, my office book shelves are filled with trading books on all the popular subjects... personal psychology, money management, fundamental and analysis, technical analysis, etc... and at the end of the day, they start to all pretty much sound the same... I am actually embarrassed to admit how much time and effort I have put toward trying to learn and make all that stuff work.
Then comes along your book... The first read instantly changed my whole way of thinking and my approach to markets...
And yes, the chapter on Dr. Watermelon Stuffer...really pulled the curtain back, and your analogy made perfect sense.
Chad V
Las Vegas, Nevada
Author | Volatility Illuminated
