As traders, technical analysis is a significant part of what we do—in the beginning, most of our time is focused on fine-tuning our strategies based on technical indicators.
What is a trading indicator?
The simple answer to this question is “any tool that provides you with an indication to make an assumption/bias on the market”.
With this statement clearly In mind, technical analysis starts with 1s & 0s and ends with a visual representation of the market on our screens. It does not matter how we visualise this information( Line, Renko, bars), as there is no right or wrong. At this point, we forget to understand how the information on the chart is formed.
Where does the data come from, and is it accurate?
The modern era of trading provides us with an expansive array of tools to manipulate the data as we see fit. Some of the most common tools used are bar charts and moving averages. A Bar charts slice the markets by Price over Time, which provides a clear depiction of the High, Low, Open & Close. Those 4 points of data are critical to understanding how different data can have an unforeseen effect on all the other indicators a trader will use.
Here are two charts below; which one is accurate?
I have highlighted the variations on the chart for you. As you can see, the High, Low, Open and Close are different. While we can not categorically state which chart is more accurate, it is clear two traders can be looking at variations of the same market. You might not have these issues in the stock market because price data is delivered from a central source. Forex, Metals and cryptocurrency markets are decentralised, with varying sources for price data.
Debunking a few issues
- Candlestick patterns could never be an accurate way to decipher market participation when you look at the example above.
- Price over time in a decentralised market is open to different interpretations with technical trading strategies. As the image above is taken from a daily timeframe, you would have assumed there would be “Less noise”?
Noise has nothing to do with data streaming, as both charts are accurate based on the data provided by the source (the broker). It is clear that if we add a moving average to the chart, we will get different outputs from the indicator. Let us take the same charts and add a five-period moving average and a ten-period moving average to highlight any variations.
Let’s take a simple strategy – if Price is above both moving averages, we go long, below we go short. On the 28th of April, this strategy had mixed views, with the chart on the left stating no trade and the chart on the right providing you with a potential signal to go long. Look closer at the 28th of April, and you will see the High, Low, Open, Close are not the same. This data is utilised in the moving averages, and now we can clearly understand why traders are not always aligned even when using the same strategy.
- Moving average traders could be going long at this point or sitting on their hands.
- Candlestick pattern traders could be looking to go long as well.
In the end, no trader is aligned because our data sources are different at this point. Once the market moves into the trend, all indicators are aligned, and the move upwards is clear as day.
So with these examples, you must be wondering how do we define accurate data. There are multiple approaches you can take with decentralised markets.
- Complete the same analysis from multiple brokers to understand what the majority of traders are seeing
- utilise other indicators to provide you with an additional filter – Volume
- Make sure your execution brokers charts is as close to the analysis charts data. MT4 charts are not the same as Tradingview charts.
In the end, it is our belief, but in some circumstances, some charts are just more accurate than others 🤦🏾♂️