Anyone who has followed my forex trading educational material for any length of time knows that I do not promote the use of indicators as one’s primary market analysis or entry tool. Instead, I teach my students to trade off of a plain vanilla price chart by learning to read the pure price action that occurs each day in the forex market. This article is going to explain exactly why trading with indicators is detrimental to your success as a trader, and why you should learn to trade with simple price action setups instead. So, forget about the confusing haphazard mess that indicators leave all over your charts and let this article open your eyes to the power and simplicity of trading with pure price action.
1. First hand vs. second hand data…
The root of the problem with using indicators to analyze the forex market lies in the fact that all indicators are second-hand; this means that instead of looking at the actual price data itself, you are instead trying to analyze and interpret some variation of price data. Essentially, when traders use indicators to make their trading decisions, they are getting a distorted view of what a market is doing. All you have to do is remove this distortion (the indicators) and you will obtain an unobstructed view of what price is doing in any given market. It seems easy enough, yet many beginning traders get suckered into clever marketing schemes of websites selling indicator based trading systems, or they otherwise erroneously believe that if they learn to master a complicated and “fancy” looking indicator they will for some reason begin to make money consistently in the market. Unfortunately this could not be further from the truth, let’s begin by looking at the two main classes of indicators and discuss why they are flawed:
– Leading and Lagging indicators…
Technical chart indicators come in two different forms; they are either “lagging” indicators or
“leading” indicators. Lagging indicators are also known as “momentum” indicators, the most popular lagging indicators are MACD and moving averages. Lagging indicators claim to help traders make money by spotting trending markets, however, the problem is that they are “late” to the ball, meaning they fire off a buy or sell signal into a trending market after the market has already started to trend, and just as it is probably about ready for a counter-trend retracement.
The other problem with lagging indicators like MACD and moving averages is that they will chop you to pieces in consolidating markets; firing off buy and sell signals just as the market is about ready to reverse and re-test the other side of the trading range or consolidation area. So, essentially, the only real use that lagging indicators have is in helping to identify a trending market, and I do actually use certain moving averages to aid in trend identification. Check out my price action trading course to find out exactly how I implement moving averages with my price action setups, they are the only indicator that I use and I do not use them for anything other than identifying dynamic support and resistance areas.
Leading indicators include such popular ones as the stochastic, Parabolic SAR, and Relative Strength Index (RSI), these are also known as “oscillators”, because they oscillate, or move, between a buy signal and a sell signal.