
Soooo... what does it all have to do with Stochastic? First of all, let me say it's not about this particular indicator. It's about Technical Analisys in general. Just how often have you heard and maybe said "TA doesn't work!" Or "MACD doesn't work" (insert any other technical indicator or study known to human)? Or, how often have you read yet another heated argument whether they work or not? Here is the deal: unless your computer is broken, they always work! As in, they do what they are intended to do. And this is where major misunderstanding lies: many think that TA is intended to bring profits. Wrong. Indicator is intended to indicate. Something. Anything.. As long as it indicates, it works. Yeah, but why doesn't it bring profits? For the same reason that the camera doesn't take photos by itself even so as long as shutter clicks it works. And for the same reason that the pan doesn't cook a dinner even though as long as it heats up it works. It is designed to provide you with certain tool - and that it does. How you utilize the tool is what defines success or failure. Returning to particular example of stochastic: it indicated the reading below 20%, did it work? Sure, it indicated what it was designed to indicate. Now, what do YOU do with it? Do you enter long for bounce? Do you wait to see whether the price doesn't bounce so you short for downtrend continuation? Do you add another indicator to get some combined reading? Rephrasing it all, it's about how you incorporate certain TA in YOUR trading approach. If you do it right, profits come. If not - this is your approach that doesn't work, not the TA. Or, you incorporated that particular indicator in a wrong way and some tweaking is in order.This all seems to be trivial when you go through this methodology of thinking and comparison; so why is it not that obvious from the get-go? Well, remember the thing about sophistication? In exactly the same way as it seems to be not so obvious in case with camera vs. case with pan, many of technical indicators and studies are being percieved as quite complicated (and they often are). Something so smart must be doing some serious work and lead to solid results... can I relax while it's working and harvest when it's done?Understanding of real purpose of TA is quite crucial for working out the right trading approach. It also leads us to interesting and somewhat controversial topic of trading systems. That, however, is a topic for another post. For now, let's agree:


1 comment:
Hi Vad, just came across your blog. Thank you for very logical and informative posts.
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