A trader shared an indicator with me recently that appear to call market tops and bottoms with razor-like precision.
Here is a an actual screenshot with the indicator running on my M15 EURUSD chart:
The purple dots are the work of the indicator. Each dot represents a turning point in the market. So if price was going down and a purple dot appears, it’s time to go long, for example. To milk the position as much as you can, hold on until you get another purple dot, and go the other way.
In the above chart, the EA got it wrong only once, maybe.
So, 9 easy winners, totalling over +350 pips, a single “maybe” loser of just 10 pips and all over in half a day’s trade.
The EA worked just as well on pretty much any chart I placed it on. Incredible isn’t it!
Here is the USDCAD M15 chart.
This time, the purple circles are mine, by hand.
Ah, but I’m just looking at previous moves and marking the swings in hindsight, am I not? A pre-schooler with a crayon could do that.
Here is the thing though – the EA is doing exactly the same thing. The EA is looking at historical price and marking its calls, in hindsight. This is known as repainting.
Let’s look at some traditional indicators, like moving averages, to clarify what’s going on here. I’ve added a 15 period and 5 period simple moving average to my USDCAD chart (same as the one above). When the moving averages cross-over, I have a trade.
Let’s breakdown what is happening here.
1. This is where our amazing EA indicator said us to sell.
We’ll get back to this, because it’s an outright lie.
2. This is where our moving averages cross, giving us a sell trade.
3. This is the price that we actually sell at. Do you see how far price has fallen before the moving averages cross and give us our sell signal? This is why indicators are all known as lagging – they lag behind price.
4,5,6. All losers
However, lagging and repainting are very different things.
Lagging is normal for an indicator – it calculates something based on historical price, so it needs those prices to form before it can do it’s work.
Repainting is when an indicator goes back and marks where it would have sold or bought. So it looks really good in hindsight, but is nearly impossible to trade in real life.
How does it do this?
Easy. Let’s assume price has been going down for awhile. Then it starts going up. Once it’s gone up a good distance, the indicator goes back on the chart and marks the market bottom. Easy as pie, dishonest as they come and entirely useless to trade.
When price is trading up at the area marked “2”, our amazing EA goes back and plots a purple dot at the area marked “1”. So by the time the swing is marked, the move is over. And often, as you’re seeing here, price is ready to turn around and do exactly the opposite. This is repainting.
Be aware of EAs that repaint.
That AUDUSD M5 chart I just showed you is still running the repainting EA.
Look at this:
How far do you think price has to go up before our EA goes back and calls the bottom? Completely untradable.