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A Self Defeating Indicator?

Well the response to my attempt to build a custom indicator has been amazing, thanks for all the kind words so far. I have made a lot of progress over the last day, to the point I have a very basic version complete and early testing is, well, very encouraging. It got me thinking about the conundrem I read in many books, on websites and in chat rooms about whether releasing details of an indicator to the wider public renderes that indicator useless if it gains popularity.

My opinion?, of course not, let's think about it logically. Let's say we have a fantastic indicator that tells you exactly when to go long and short and at what time, and let's say that this indicator is so popular that it is used by 50% of all traders (pretty darn good indicator). Now if a signal is given to go short on the EUR/USD at 1.1755, if 50% of traders have the same signal, what does that mean for it's reliability. If you think about it, it actually means it is more reliable, as now, while the other 50% of traders move the market around, the 50% with the indicator signal have all placed short orders at 1.1755. What happens then when the price is moved to that level by the other half? An enormous amount of short orders are triggered, sending the price plummeting quickly, therefor making the indicator a self-fulfilling prophecy. I have mentioned this principal before in my discussion Pivot Points and it holds true here in my opinion.

So in the main, all authors who "can't reveal all my secrets", either:
  1. Don't actually have a trading secret at all
  2. Are protective of their precious indicators
  3. Let ego determine that only they deserve to know the secret
So for me, if I ever had an indicator that was the bees knees, I would be sharing it to as many people as possible.

Best of luck with the day's trades, I will post some preliminary test results in the upcoming days.

Happy trading!

This entry was posted on Tuesday, December 13, 2005 at 7:56:00 AM. You can skip to the end and leave a response.

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Posted by Anonymous Anonymous:
Sunday, April 16, 2006 6:05:00 AM

You're very generous, but what you write about improving an indicator's reliability by releasing it to the general public isn't necessarily true.
First, trading is a zero sum game. When 50% of all traders use your indicator and make money doing it, they get paid by only 50% of all market participants, instead of 90% as usual.
Second, when everybody goes short at exactly the same price, the price will plummet down like crazy indeed, but nobody wil get filled. People can and will react to that by simply going short 10 pips early, but then everybody does that and your indicator stops working at all.    



Posted by Anonymous Martin Eshleman:
Thursday, July 23, 2009 9:06:00 AM

You're exactly right. The more people using the same indicator and placing orders with it then the more reliable and profitable the indicator will be. There are many people that don't understand this. Thanks!    



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