Repainting indicators produce false trade signals that come and go. Expert advisors that trade real-time can have disastrous results when signals repaint. Are there non-repainting indicators? We demonstrate some examples here and show you how to produce non-repainting signals from moving averages and Bollinger Bands.
Problem with repainting indicators
Trading indicators used in stocks and forex trading are highly valued by users because they simplify price action. However many trading indicators also have a problem of repainting. Repainting is a highly documented phenomenon and a problem to unwary users. You can follow this phenomenon here and here.
Simply put, trading indicators produce signals based on price action. Rapidly fluctuating price action can cause the leading edge of indicators to wiggle around. When price is fluctuating wildly, indicators can sometimes produce trade signals that come and go i.e. repaint. One moment it’s there, next moment it disappears. Because the leading or current candlestick keeps moving, the leading edge of an indicator keeps changing until price stops or goes on to a new candle.
Many traders have encountered this situation where they jump in on a trade when they see a signal but shortly after price reverses, the trade goes wrong and the trade signal disappears as well.
This is very important. Experienced traders and good expert advisors/trading robots make trades only at the end of each candlestick so that a trade signal can be confirmed.
One reason why backtesting may not reveal the true performance of bad expert systems that trade real time is because bad signals that come and go will not show up because of repainting. (They will show up when you do a forward test or when you do a backtest on a lower time frame or even tick by tick.)
Are there non-repainting trade indicators at all?
Yes there are. As long as you work with price that will no longer reprint, the indicator will not repaint.
In this MT4 screencap of USDCAD, there are two indicators at work.
These levels are used in my trading strategy. At point 1, an indicator prints 52-week high/low. The 52-week high/low is a level that is well-known and has tremendous value. I have documented it here.
At point 2, a ‘period close’ indicator highlights end of month close. This indicator can be personalised to show end of day/week/month/quarter/year.
These indicators do not repaint because they work on past levels that have future predictive value.
How to create non-repainting signals?
Most common indicators have two portions: the leading or forward edge which is based on the latest candlestick and the historical portion trailing right behind. The leading edge will repaint as long as the current candlestick continues to change. The trail will not repaint. To produce a non-repainting signal, make use of the trail instead of the leading edge.
In this screencap of the USDCAD, I put in a 2-period exponential moving average displaced by 2. This is a very common indicator. I first encountered a trading strategy used by a futures guru nearly 20 years ago that employs a 3-ema displaced by 2. Like any other moving average, the leading edge of this indicator will continue to repaint as long as the last candle is moving. However the trailing portion that is sitting right under the last candlestick will not repaint because it is based on the 3rd and 4th candle from the right.
In this next example, I shifted 20-period Bollinger Bands indicator by 1 period to the right. The leading edge will continue to reprint as long as the current candlestick keeps moving but the trail will not change because it is based on the 2nd to 21st candle from the right.
So if your trading signal requires a very precise non-repainting reading of Bollinger Band over or under your current candlestick, then shifting it’s fickle leading edge to the right is a solution for you.
Takeaway from this post
Traders can have very personalised trading strategies even with common indicators. Repainting indicators, repainting trade signals do pose serious problems to traders. Once you have intimate knowledge how price action works, how existing trading indicators were built and know precisely what you intend to achieve, even very minor tweaking can do wonders.
If truly no existing solution can do the job, I am sure a very determined trader can build or order an indicator that will produce very exact results.