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BOOK YOUR FREE STRATEGY SESSION NOW >>Does systematic trading always mean using indicators? Not exactly.
There's a pervasive belief that to engage in systematic trading—or trading in general—you need to load up on indicators.
But what if I told you Andrea Unger, a four-time world trading champion, achieved his status without relying on them as most traders do?
It wasn't always the case, however.
Initially, Andrea believed that the perfect trading system could be built through the use of indicators.
Yet, he found a different use for them. In this video, you'll discover:
-Andrea Unger's favorite indicators and why they might be useful to you too
-How to effectively use these indicators
Enjoy the video!
Systematic Trading and Indicators
Indicators in systematic trading. Well, this is an interesting topic, you find other videos in our channel about this, but I'm still asked about that. I'm Andrea Unger and I'm the only four-time world cup champion in trading with real money, so far at least, and that's also why many people think that I use plenty of indicators in my models.
You know, I build automated trading systems and also at the beginning of my career, I also thought that indicators would be the answer to building systems. I obviously started reading a lot about technical analysis and in technical analysis you get many indicators presented in a very convincing way with explanation and theory, many things that convince you that indicators make sense. So, I thought that putting together many indicators in the best way possible, I would get the best system ever.
I was not really modest, I was not humble at that time, I really thought that I could generate the best system that ever existed, just putting together indicators in a very clever way and I'm still looking for that, I never found it. I came to the conclusion that that is not the way to go and I'm still convinced that it is not the way, even though I’ve never dropped studies, I still look into stuff and if tomorrow I’ll find a way to use indicators the way it's suggested to use them in technical analysis, I will for sure tell you and let you know because I would be happy to discover a new way to trade the markets. As of today, I've not found that.
The Unger Method: Simple Yet Effective
I started putting together stuff, stochastic, MACD, moving averages, RSI, a lot of stuff and nothing came out. I was just putting together conditions, getting a heavy code to test and getting something that was cancelling a lot of trades from basic models but nothing that showed convincing results. It was frustrating, believe me, it was frustrating and then I arrived at the moment when I developed the Unger Method as you know it.
Very basic setups, simple setups, buy here, sell here, where here is high of yesterday or the high of today so far, or the high of the last five days and sell here the low of yesterday and the low of today or low of five days ago and whatsoever. And exit here and here might be the end of the day, appeared after a couple of hours, a couple of days or a profit target or whatever. But very very basic and simple rules. But believe me, those rules for first time showed me profits in my trading systems.
The Role of Indicators as Filters
So, now came the time where you got the revenge of the nerds, I got the revenge of the indicators. It comes the time where you could imagine to even use indicators but not as a setup, as the model to generate trades. But at this stage on my basic model, built with the Unger Method I could add indicators to filter trades to get the best trades possible out of all the trades that my basic model generates.
And here, indicators can help because they can define certain market conditions that are more in line with your model. It's not a mystery, my favorite indicator for this kind of stuff is the oscillator, the ADX, Average Directional Indicator. And the ADX, not calculated on 14 bars as default normally presented, but on 5 bars, 5 days normally.
And this with filtering trades, when it is allowing trades only when it is below 40 or 35, enormously helps in trades at breakout. Breakout entries are incredibly improved by the filter of this indicator. Just because it limits all the situations where we have excessive acceleration in the market which leads probably to tired entries.
So, if you enter only when it is below 40 or 35, when you have a situation which is a bit quieter, let's say, and you get a big advantage when the move starts. This is just an example, I also used in my trading other kinds of filters. An astonishing one is the moving averages.
I thought - I still think it could be a good idea - that, for example, intraday trend-following strategies on the market, you enter somewhere and then you exit at the end of the day, so, my idea was that if I took these entries only in case the close of yesterday was above, let's say, a 20 days moving average, then I would have an advantage.
Because I was in a short-term uptrend and my long entries would have a better chance to end up as a winner. A strange thing that was not always true. Sometimes it worked, sometimes it did not work, sometimes I got the exact opposite results.
Long entries work better if we were below the 20 days moving average, which is weird, but it works. So, the moving averages might be tricky and this sort of puts in a strange light all the theories about price action and so on, where you often use to build your entries on medium-term, short-term moving averages and so on. So, where are we and so on.
But I can tell you, not always you get the same exact message from filtering trades with the moving averages. The reason might depend on the basic model you use. Some models might have a better edge when you are in the opposite market condition, because these entries might just catch some rebound or some retracement.
So, you need, for example, a short-term downtrend to ride an up move for a couple of hours, a day or so. So, be careful when you use moving averages because the intuitive use of them is not confirmed by the tests and the tests are something that, in my opinion, rule, because they tell you what really happens on the market.
Exploring Different Indicator Types
Other indicators that I happen to use sometimes are position indicators.
For example, I used, what was frustrating, Fibonacci levels and with Fibonacci levels I was never able to get any decent strategy. Not using them as support or resistance to rebound, not using them as levels to break through to get something. Never ever anything.
By the way, to use Fibonacci levels or any level as support or resistance is really challenging to program in a software, because obviously the markets will never exactly touch the resistance level or the support level and then do something. If they really have to turn around, they will do so in an area or neighborhoods of this level, not exactly on the level, I mean one tick above, three ticks above, two ticks below, it doesn't matter, just somewhere around the level, if the level works. But it's hard to compute this, it's hard to code this in the code, it's hard to tell the machine - around the level - this around is not easy to code.
I mean, probably now some experts will say this is a bullshit reader and so on. No, okay, I'm not a programmer, I'm trying to keep things simple and to promote simple stuff. So, if you go for simple stuff, to get simple setups, simple strategies and so on, believe me, to program action on a specific level is not something for you, not for me, not for you.
That said, Fibonacci levels never showed me any decent reaction of any kind. Different story is the Bollinger Bands. Bollinger Bands with a standard setup, 20 periods, two standard deviations, they are something I like to use on counter-trend strategies, where I find inversions of the trend of the market around the Bollinger Bands levels.
So, normally I work on 30-minute bars and if one bar closes, for example, above the upper level of a Bollinger Band and the next bar closes below the upper level, so it goes back inside the envelope, then I might enter short, because I believe there is a downtrend to start. And the same thing on the lower level when it closes below and then it comes back again. And this is something I could use, but believe me, not necessarily the Bollinger Bands are the best choice.
I mean, they work, they do work, but if you use, for example, high or low of yesterday, you have a similar effect. So, it's not the secret behind the Bollinger Bands. The difference is that the Bollinger Bands are not constant during the day, they change every bar, while the high of yesterday, of course, will be the same throughout the day, until there is a new day.
So, you have a fixed level opposed to a moving level and that is something some people might prefer, some people not. It doesn't really matter. But Bollinger Bands are something decent.
I build them on 30 minutes and this is something I've already explained in another video. Indicators, if you really want to use them in your trading, should not be used on too small timeframes. 30 minutes is, in my opinion, the limit.
Maybe 15 in some cases, but don't try that. It's funny how some people come and try to promote stuff where they use MACD on one-minute bars. This is ridiculous, believe me.
It's ridiculous. Now, indicators are built on the close of a bar and one-minute bars are short. Now, imagine the close of a bar might change.
Noise in the markets, one tick above, one tick below, but one tick on such a small bar is something. It has certain importance in one bar, while one tick or two ticks on a 30-minute bar, big bar, that's something that is nothing. So, obviously, the larger the time frame, the more important the information will get out of indicator, because you clean up all the information from noise, which is present in the markets.
But, that said, you can use them. So, indicators, yes or no? The answer, maybe, it depends. Indicators to build setups, to define where to enter, how to enter, no. Don't try this at home. I can tell you this is not the way to go. I doubt you can find anything decent to do so.
Basic models, maybe with the Unger Method, and then you use indicators to filter trades, yes or yes-ish. In some ways, they can work. ADX, it's fine. Bollinger bands as levels, they might be well. Moving average, be careful if you are at your start in your trading career as a systematic trader, be careful, because the information you get is not what you are looking for.
Conclusion and Outlook
But, generally, you can try something, but only to filter. Use basic models, simple models, and then, if the basic model shows promising results, I mean, it's not losing, then you can try to filter the operations of this model with something and also, eventually, with indicators. I'm still looking for a solution with indicators and, believe me, if tomorrow I'm finding it, I will let you know, because I will be the first person among you all to be happy about that.
I doubt I will and not because I'm stupid. I might be stupid as well, but I really believe that that kind of solution is not out there. So, I will be using indicators only as filters for the rest, probably, for the rest of my trading career.
That's it, guys. I hope you got some good edge from this and if you find something, please write it down in the comments. I'm happy to read it. I'm happy to exchange information. We are here just to help and happy trading. Ciao from Andrea Unger.
We'll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.
BOOK YOUR FREE STRATEGY SESSION NOW >>Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.
I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems.
In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.
Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.
Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.
