Indicator Limitations

Lag

Averages, MACD and most oscillators are computed from a window of past prices, so they change after the price does. A signal that appears when a trend is well established is right about the past and silent about the future. Shorter settings reduce lag and increase noise; there is no setting that removes the trade-off.

Overfitting

Any indicator's parameters can be tuned until it would have produced excellent signals on last year's chart. That tuning captures last year's particular sequence of noise, and it fails next year. The test of a setting is whether it works on data it was not tuned on, which Course 8 covers under testing.

Redundancy

A chart with six indicators usually has two kinds of information shown six ways. Extra indicators do not add confirmation; they add lines that agree with each other by construction and make the chart harder to read. Two or three, of different kinds, is the practical maximum.

What indicators are for

• Measuring: ATR gives volatility a number; a moving average gives direction a line.
• Filtering: only trade with the trend the average shows; only enter when momentum agrees.
• Warning: divergence and shrinking histograms say a move is tiring.
• Not for: predicting turns, replacing levels, or generating trades on their own.

The primary evidence

Price, structure and levels are the data. Indicators are summaries of the data. When the summary and the data disagree, the data wins, and a trader who can read structure without any indicator at all is in a better position than one who cannot read it with ten.

Key takeaways

• Indicators are calculations on past prices: they lag and can be overfitted.
• Similar indicators are redundant; two or three of different kinds is enough.
• Use them to measure, filter and warn, not to predict.
• Price and structure remain the primary evidence.