Last week we learned that indicators definitely do work.
Putting an indicator on a chart (in this case, Stochastics), waiting for a signal, and then holding for a set period of time produced a substantial amount of profit and had less drawdown than buy-and-hold by a country mile.
So, if the data shows that an indicator is an effective way to beat the market, the question now becomes: which indicator works best?
I've heard sentiment that one indicator is very much like another. Worrying about which indicator works best is counter-productive and a waste of time.
For the most part, that's been my opinion, too.
Now I'm not so sure.
For one, the calculations are all so different. I'm starting to think the math behind some indicators is more relevant than the math behind others.
For another, the numbers show that some appear to work better.
As I mentioned, the first indicator I ever studied was Stochastics. That's why I used it in last week's case study.
But my favorite indicator is RSI.
I love the way it trades. When RSI goes to Overbought or Oversold, it feels like it means something. I also like the way it works in real time. Emotionally, the RSI indicator seems to accurately depict market action.
It seems like a trading career could be based around using the RSI.
But is it true? Are my feelings misguided? Let's find out.
For reasons I've already outlined, we're going to stick with using the ES on the Daily time frame, and we're going to stick with a time-based exit.
It makes sense that, if an indicator really works, we should be able to take a signal, walk away, and come back to see money in our accounts.
So we're using a hypothetical $25,000 account on the ES on a Daily chart, Long signals only, one contract each trade (no compounding), and holding for about three months (60 days).
Here are the results.
From 1998-June, 2018, Stochastics (14 length/20 Oversold) produced $67,658 of profit with a close-to-close max drawdown of -$21,588. The win percentage was 71%.
From 1998-June, 2018, RSI (14 length/30 Oversold) produced $68,772 of profit with a close-to-close max drawdown of -$15,828. The win percentage was 81%.
[Remember, buying-and-holding the ES for the same time period had a max drawdown of over $55,000 and produced profits that were 300% LESS than what RSI achieved.]
Whoa. It appears my gut feeling was right. RSI does capture market action better than Stochastics and is a better indicator.
RSI makes more money, has 26% less drawdown, and has a higher win percentage.
However, RSI also produced less trades. Apparently it's harder for the ES to go into Oversold on the RSI.
Stochastics traded 47 times in this time period while RSI only traded 27 times. If you like more trades, then that might make you lean toward Stochastics even though the overall numbers aren't as good.
The bottom line: it looks like some indicators do work better than others on robust instruments like the ES.
Which, of course, begs the follow-up question: does anything work better than RSI?
We'll look at that at tomorrow's YouTube video.
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