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Using Indicators as a System or Filter

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Indicators can be used directly as a trading signal, or their readings can serve as filters for trades based on charts or other analysis. Jack Schwager, well-known author of the Market Wizards and other trading books, says that’s a decision each trader has to make in using three new indicators he has developed primarily to catch major trend moves. They are available exclusively on TradeShark and are easy to use and add to a template

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My guest today is Jack Schwager and he is best known for his market wizard books.  He’s talked to thousands of traders and money managers over the years.  Jack you’ve developed some proprietary indicators for TradeShark let’s just talk about indicators in general first.  How important are they for traders?

            That depends on the individual traders, so the first decision someone has to make, whether it’s my indicators or any other indicators, is are they going to be used for absolute to generate buy and sell signals or are you using them as a tool as a edge on to something else.  So, you can use the indicators to deliver direct buy and sell signals and treat is almost like a trading system or you can use the reading whether it’s positive or negative or beyond some threshold as confirmation that you should only trade the market in that direction using chart analysis or maybe using another indicator so it’s flexible enough to be used either in a systematic way or to be used as an additional tool.

            How do the indicators come about, you talk to a lot of traders, have seen a thousand of indicators probably, how did these come?

            I’m more of a systematic guy not a indicator developer guy.  So they come, the origins come out of  system design and system building and what they really are, are composites of systems, the indicators are not really like just a simple algebraic formula, they literally are composites of different systems.  Basically, when I was asked to do the indicators I kind of thought what I wanted to achieve and so they are designed for that purpose.  The indicators are designed in following:   First, define the major, you know what trend, what is the major trend in the market.  Second, not just what is the direction but how strong is the trend.  Third, is their indication or is the trend getting over extended and you want to have that as compensation because if you rely totally on trend you will be totally long at the top and totally short at the bottom.  The forth thing is to be able to combine both those trend oriented inputs with the over bought over sold inputs into a composite that when that composite is high gives you a strong reading either long or short which blends both the trend and the counter trend components.  Fifth is to have some customized ability to it that you don’t have to make it absolute, you want to have the user be able to make the signal more restrictive or less restrictive, that’s achieved by just one simple threshold parameter that’s extremely easy of a click to set, so that sort of blends very well with the software.   The last thing is to have the indicators so they can either be used as buy and sell signals or to be used in conjunction with other approaches, technical analysis whatever as a confirmation or filter.

            What type of trader is best suited for your indicators and for TradeShark?

            I think particularly for these indicators position traders are people looking to capture major moves, that’s what it’s ideally designed for because it’s not an indicator that’s looking to catch squiggles, in fact if it works well it will ignore the squiggles.  It’s really trying to define the major moves and also tell you when the major moves may be getting to far extended.  It’s a tool for trading major moves really.  That’s the primary function.  However, if you’re a shorter term trader you can still use it because when it is in a longer term buy mode or long term sell mode you can use that as a filter for which direction you should be biasing in your short term trades.  What I would suggest is the first step would be to take these indicators and to use the TradeShark software to create your own templates.  The software makes it very easy to design it any way you want and by that I mean to decide which of the three indicators or all three that you are using whether you are stacking them superposing them, creating charts which show you one indicator is long or short based upon the shading, experiment getting the design of the chart the way you’d like it.  Now once you’ve got that then the things to do is to take that template, you can save it as a template, take that template and then try all sorts of markets, different prices, different on all sorts of different markets, prices, using that template.  Then you can see how the indicators are working in markets in a lot of different examples.  Here very important, I would suggest or strongly recommend that regardless of what length chart you normally use, I don’t care if you use a 3 month, 6 month, 1 year whatever.  For this first step use longer term charts say two years, maybe even 3 years because what you want to do is get a feel for how the indicators are working over major trends and trend changes and really get an understanding of how they work.

            You’ve worked with TradeShark for a while.  What’s your impression of the ease of use because there’s a lot going on under the hood there.

Right, right, no, I was actually almost thrilled to see how easy it is to use.  My initial inclination was to kind of tell the programmers exactly how it should look and when I got the software installed I actually saw that you didn’t have to do any of that because you can do it very easily so the key to it is the suability to create your own template and that is absolutely essential.  I’ll take it very specific in my case what I did with the three indicators I wanted the directional weight to be the main indicator, that might not be the same for everybody that’s my case so, I took that superimpose it on price as the main chart and shaded the background to be light green when it’s buy mode, light red when it’s sell mode and yellow when it’s in neutral mode.  That sort of makes it very nice to see how the indicators interacting with price.  And then right below it the software allows you to put sub plots that stack exactly.  So I have a sub plot of the trend indicator and another sub plot of the over bought over sold which together make up the main indicator directional weight.  One little chart, I’ve got it all.  It only takes a few clicks to create each of those components.  Once you’ve got that, you then save as a template, then you can create as many templates as you want, but you save as a template and make that your default template then I can pull in any charts I want, I don’t have to recreate all of those steps, it’s there. 

Jack, thanks for being here today.

I enjoyed it.  Thanks!

We’ve been talking with Jack Schwager about his indicators exclusively available on TradeShark software.

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