Traders have debated indicators versus price action for decades, but very few have actually run rigorous comparative backtests on the same markets over the same period. Scott has. The rule-breaking Forex trader and systematic strategy researcher has been tracking simple indicator-based and price-action-based strategies in live conditions since 2021, and what he found in the 2022 bear market upended some commonly held beliefs about which approach is more durable.
Scott is known for testing trading orthodoxy empirically rather than accepting it at face value. His previous BST appearance focused on “breaking the rules for higher returns” – challenging conventional wisdom about stops, diversification, and strategy construction. In this follow-up, he turns the same empirical lens on one of trading’s great debates: is a clean chart with pure price signals better than an indicator-driven approach?
The short answer is nuanced. The full answer includes some specific strategy results from 2022 that systematic traders should find instructive.
Watch the full episode below, then read on for the complete breakdown.
Defining the Terms: What Price Action Actually Means
Before comparing the two approaches, Scott is careful to define what he actually means by “price action” – because the term is used loosely and people often argue past each other without realising they’re talking about different things.
For Scott, genuine price action in a tradeable, testable sense means:
- Breakouts: Price breaking above or below a defined level (40-day high, 20-week high). This is clear, mechanical, unambiguous.
- Specific chart patterns with objective definitions: Head and shoulders, cup and handle – but only when the pattern can be defined with enough precision that two traders looking at the same chart would both agree whether the pattern is present or not.
What he explicitly excludes from “reliable price action” are candlestick patterns – dojis, engulfing bars, haramis, key reversals. His testing consistently found these to be unreliable. A doji appears on a chart and looks like a reversal signal, then a news event steamrolls it in the original direction. The patterns don’t encode enough information to overcome the noise in shorter timeframe data.
Chart patterns like head and shoulders and cup and handle do have documented statistical properties according to third-party research Scott references – with head and shoulders ranking as the most reliable and cup and handle second – but only on daily and weekly charts. Applied to shorter timeframes, the reliability drops sharply.
The Simple Indicator Strategies That Survived 2022
Scott tracks multiple simple strategies on his website, updating them monthly, with full rules published openly (inspired by Richard Dennis’s claim that he could publish the Turtle rules and most traders still wouldn’t follow them). Two examples stand out from his 2022 analysis:
The Three Moving Average Cross
Rules: long when the fast moving average is above the medium moving average, which is above the slow moving average, and the fast has just crossed up. Exit when the moving averages reverse. No stop loss.
On GBP/JPY in 2022, this strategy produced approximately $5,600 in profits on a $20,000 account – roughly 25% for the year – while the equity market was down approximately 20%. The strategy’s equity curve shows significant drawdowns during non-trending periods, but the trend periods more than compensate.
Scott’s key insight on this: the pound/yen is one of the most consistently trending Forex pairs by virtue of its high average true range and its tendency to make sustained directional moves. Trend following strategies applied to this pair dramatically outperform the same strategies on low-volatility, non-trending pairs like AUD/USD or USD/CAD. He has stopped trading the underperforming pairs and runs his trend following purely on the instruments that trend – an obvious point that many traders ignore in the name of diversification.
The Master Trend Robot: Bollinger, RSI, and Stochastics
Scott’s second example uses three classic indicators – Bollinger Bands, RSI, and Stochastics – either individually or in combination. The unusual twist: the Bollinger Band component goes long when price closes above the upper band (not the conventional mean reversion approach of shorting it). The logic is that a close above the upper band indicates expanding momentum and should be followed, not faded.
This counterintuitive setup – using a “reversal” indicator as a trend continuation signal – reflects the same philosophy that runs through all of Scott’s research: test what the data says, not what convention says.
Head-to-Head: Indicators vs. Breakouts in 2022
When Scott compares indicator-based strategies against breakout (price action) strategies over 2022, the indicator strategies held a slight edge through most of the year. In the final 20-30 days of the period covered in the episode, however, breakouts roared back and were nearly level with the indicators. Both approaches worked in a trending environment – which 2022 provided abundantly, particularly to the short side.
The strategies that failed in 2022 were the ones designed for the regime that preceded it: buy-the-dip strategies, mean reversion approaches calibrated to the 2009-2021 low-volatility equity bull market, and option premium selling strategies that assumed contained volatility. Many of the traders running these strategies had created “expertise” in a single market regime and had no framework to recognise when that regime had ended.
The Longevity Question: Do Simple Strategies Break?
Scott makes a provocative claim: he doesn’t think simple, old strategies break. He references the Turtle Trading rules as an example – multiple articles claim the Turtle strategy no longer works, but when he backtests it himself, it continues to perform. His interpretation is that strategies with poor back-test aesthetics (significant drawdowns, inconsistent returns) get dismissed as “broken” when they’re just experiencing normal out-of-trend periods.
The expectation problem is real. Traders build strategies with unrealistic equity curves in backtests and then panic-quit when the live reality looks like what the strategy always looked like. A moving average crossover system with a winning percentage well below 50% and significant drawdowns is not broken – that’s what it always looks like. If you understood that before you deployed it, you’d have the conviction to hold through those periods.
What This Research Means for Systematic Traders
Several practical principles emerge from Scott’s work:
- Regime specificity matters more than indicator vs. price action: Both approaches work when the right regime is present. The key skill is regime identification – knowing whether you’re in a trending environment (both indicator and breakout strategies work) or a ranging environment (they don’t).
- Match the strategy to the instrument: Trend following strategies belong on trending instruments. Deploying a trend system on a low-ATR, mean-reverting pair for the sake of diversification is not diversification – it’s diluting your edge.
- Publish your rules: Scott publishes full rules for all his tracked strategies. His thesis is that the transparency doesn’t eliminate the edge – just as the Turtle rules’ publication didn’t prevent the edge from persisting. Most traders won’t follow the rules anyway, particularly through drawdowns.
- Track strategies across multiple years: Scott has been tracking some strategies since 2012 without changing them. The multi-year track record across different regimes is the validation, not the back-test.
- Expect unrealistic expectations: The most common reason traders abandon working strategies is that they back-tested them with unrealistic smoothness. When the real-world drawdown looks like the historical drawdown should look – significant, extended, uncertain in duration – it feels like the strategy is broken. It isn’t. Build the strategy knowing what it will look like through difficult periods, and you’ll have the conviction to hold through them.
The 2022 Bear Market as a Live Validation Test
Scott notes that 2022 provided one of the most valuable live tests for systematic strategies in recent memory. The year produced sustained trends – primarily to the downside in equities and upside in commodities and energy – that rewarded trend-following approaches regardless of whether they were indicator-based or price-action breakout systems.
The strategies that failed were those designed specifically for the 2020-2021 environment: buy-the-dip in growth stocks, zero-DTE options premium collection in low-volatility conditions, and any strategy that assumed markets would quickly reverse extreme moves. For systematic traders, 2022 was a reminder that diversification across market regimes – not just across markets – is the most important form of risk management a trader can have.
The episode is a useful antidote to the constant stream of “strategy X is dead” content that appears in trading communities after difficult periods. Scott’s multi-year data shows that the oldest, simplest strategies – three moving average crosses, Bollinger Band momentum, basic breakout systems – continue to deliver when deployed on the right instruments in the right conditions. The question is never whether the strategy works. The question is whether you understand well enough what conditions it needs to work in, and whether you can hold through the periods when those conditions aren’t present.
Related episodes
- The New Indicator That Improves Momentum Trading Signals with Alex Spiroglou
- A New, More Responsive Indicator with John Ehlers
- Entries, Exits and Trend Following with Larry Tentarelli
Want more on testing and building systematic trading strategies? Subscribe to the Better System Trader podcast for weekly interviews with the world’s top systematic traders and quantitative researchers.
