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Forex Trading: Price Action Vs Technical Indicator

Most traders are under the misconception that using technical indicators makes trading easier, the belief being that indicators represent some type of technological advancement that allows anyone to solve the mystery of which direction the market is going to move with zero market experience. level indicator

Building on that misconception, the next step is to believe the more indicators one uses the greater accuracy one can trade at. Because of these misconceptions, most folks begin and end their trading career using some mix of indicators.

Remember, 80% fail at trading and statistics show most of these failed traders are using indicators.

In order to become a successful trader, it is imperative that one not do what the 80% are doing.

The majority of indicators that are most frequently used are simply some form of a collection of pricing data that creates a numerical point and then one can plot that point across a chart so that one can see some form of price average or that point is automatically plotted on a chart in a pleasing color that the trader selects.

The problem with this is that all indicators are lagging because the numbers have to be generated first such that the formula driving the indicator can crunch those numbers and come up with a result to plot. By the time that number is derived the market has already moved on. In short, indicators tell us what has already happened. Indicators are not predicative and only tell us what the overall tendency of price movement has been.

What this means is that indicators perform best on large time frames and are better used for investing and/or buy and hold scenarios. When indicators are used on smaller time frames, for instance on an intraday basis, the changes in the direction in price happen too quickly for the indicator to alert the trader. When indicators are adjusted to supposedly work on smaller time frames, accuracy diminishes and frequent false signals occur. The trader cannot determine a false signal until after it has happened and then it is too late, by that point he has lost money.

Indicators do not perform well in highly volatile conditions or in fast moving markets. The forex market is the most volatile market on the planet. Directional bias changes frequently and rapidly. These are the two toughest conditions for indicators to consistently perform, hence the high failure rate of forex traders who rely on indicators.

The single best attribute of indicator trading is that it is an easy sell. Marketing the power of indicators by looking at after-the-fact pricing data (back-testing) lures one to believe that all they have to do is purchase the proprietary indicator package or system, turn it on, and the dollars are just going to start rolling in. You have seen the “hypothetical results”. Using technology eliminates human emotions. Technology is not as error prone as human interface. The benefits that are marketed are endless and all the benefits point to “easy money”.

If indicators, indicator based systems, and software based trading programs (these programs rely on the same processes that drive indicators) are so great, why are 80%-90% not able to grow their trading accounts in a positive direction using these trading tools? Why do the statistics show that the majority of traders who attempt to use these technology based trading processes always end up giving back any profits they may have gleaned on a few isolated profitable trades, and then finally quit?

 

 

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