Advantages of using custom indicators
I decided in this article to tackle the problem of custom indicators.
Custom indicators are very important in trading, as they are not only a means to generate signals, but a means of understanding the charts and tracking the moves of the market. This psychological process that occurs for both discretionary and automated traders, in the design phase of a trading system relies on indicators, because indicators help to visualize what happens. And to better visualize, custom indicators, that show unseen elements given by regular indicators used by everyone, will help make a more clear image. And an image is worth a thousand words.
To illustrate this, think about the Heiken Ashi indicator. Not quite of a custom indicator, as it’s present in most charting packages. Doesn’t even have too much customization itself. Yet, there was a time when the indicator wasn’t invented yet. And now it’s a widely used indicator, probably one of the best indicators for painting trends. Or the Bollinger Bands. They didn’t exist “since the beginning of time” when only moving averages and point-and-figure charts existed. And yet it was a groundbreaking discovery, as previously traders didn’t have any idea of the link that exists between trends and volatility. So most of the known indicators today were actually “custom” when they were built in the beginning.
Custom indicators can be extremely complex. And there are indicators out there that are extremely complex. For instance the famous ZUP indicator, that does a “harmonic price recognition”, is in excess of 10,000 lines of code! There is a plethora of things they can do: most of what your mind can conceive, within the confines of data, processing and language capabilities. They can calculate stuff with data, do statistics, draw all kind of lines or histograms. But this doesn’t mean indicators would be magic: they are just tools. Tools to help design a trading system, manually follow a trading system, or automatically input signals in automated trading systems. That means indicators are in no way a getaway from work. No matter how well colored they are, you still have to do your homework: to establish the rules of your trading system, backtest and implementation.